Assignment
1. A stock pays an annual dividend of $2.50 and that dividend is not expected to change. Similar stocks pay a return of 10%. What is P0? (Show workings)
2. A stock has just paid a dividend and has declared an annual dividend of $3.00 to be paid one year from today. The dividend is expected to grow at a 5% annual rate. The return on equity for similar stocks is 14%. What is P0? (Show workings)
3. What is β and why is it important to investors and issuers of stock? Describe the behavior of stocks with βs of greater than one, less than one, and less than zero.
4. A companyhas 30 million shares outstanding trading for $8 per share. It also has $90 million in outstanding debt. If its equity cost of capital is 15%, and its debt cost of capital is 9%, and its effective corporate tax rate is 40%, what is its weighted average cost of capital? (Show workings)
5. What is the difference between capital structure and capital budgeting? Explain and give an example of a capital structure decision and an example of a capital budgeting decision.
6. A company has the opportunity to do any of the projects for which the net cash flows per year are shown below. The company has a cost of capital of 15%. Which should the company do and why? You must use at least two capital budgeting methods. Show your work.
|
Year
|
A
|
B
|
C
|
|
0
|
-300
|
-100
|
-300
|
|
1
|
100
|
50
|
100
|
|
2
|
100
|
100
|
100
|
|
3
|
100
|
100
|
100
|
|
4
|
100
|
100
|
100
|
|
5
|
100
|
100
|
100
|
|
6
|
100
|
100
|
100
|
|
7
|
100
|
200
|
0
|
Format your assignment according to the following formatting requirements:
1. The answer should be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides.
2. The response also includes a cover page containing the title of the assignment, the student's name, the course title, and the date. The cover page is not included in the required page length.
3. Also include a reference page. The Citations and references should follow APA format. The reference page is not included in the required page length.