Homework: FINANCE
1. Calculate the stock's expected return, standard deviation, and coefficient of variation
|
Demand for the Company's Products
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Probability of This Demand Occurring
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Rate of Return if This Demand Occurs
|
|
Weak
|
0.15
|
(30%)
|
|
Below average
|
0.20
|
(3%)
|
|
Average
|
0.35
|
18%
|
|
Above average
|
0.20
|
25%
|
|
Strong
|
0.10
|
31%
|
2. Jackson Corp.'s common stock currently trades at $47.21 a share. It is expected to pay an annual dividend of $2.23 a share at the end of year (D1= $2.25), and the constant growth rate is 7.5% a year.
a. What is the company's cost of common equity if all of its equity comes from retained earnings?
b. If the company issued new stock, it would incur a 8.5% floatation cost. What would be the cost of equity from new stock?
c. What is the floatation cost adjustment?
3. Your company estimates its WACC. You know the following information:
a. The company's capital structure consists of 60% common equity and 40% debt
b. Tax rate is 40%
c. Your company has 20-year bonds outstanding with a 9%annual coupon and currently that bond is trading at par
d. 5.5% is the risk-free rate
e. 5% is the market risk premium
f. 1.4 - is the company stock's beta Calculate the company's WACC.
4. The WACC is 7.5%.
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Project
|
Investment
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NPV
|
IRR
|
|
A
|
3000
|
-0.99
|
14%
|
|
B
|
2500
|
500
|
5%
|
|
C
|
2750
|
145
|
11%
|
|
D
|
4250
|
1
|
7.4%
|
a. Based on NPV which project or projects would you select? Projects are mutually exclusive.
b. Based on NPV which project or projects would you select? Projects are independent.
c. Based on IRR which project or projects would you select? Projects are mutually exclusive.
d. Based on IRR which project or projects would you select? Projects are independent.
e. Based on NPV and IRR which project or projects would you select? Projects are mutually exclusive.
f. Based on NPV and IRR which project or projects would you select? Projects are independent.