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Question

SR? RIN " 'his sertien consists oTiip.. Elem, fora-ombined total of ?0 points roints assigned to each prablem are duly noted. Yeu must y ou must neatly show your work including all relevant formulas end fully Problem 1. Suppose ABE Co. issuued a 20-yuar, S perecnl coupon rate hond three years ago. The bond is 30 percent, what is the firm's after lax eost of det (o points) h bnd as S1,000 face value and pays interests annually. If ADE'x rate is Problem 2. Stock in the U3 Corporation has a beta of 0.78. The market risk premium is 6 percent, and the risk- free rate is 3 percent. U3's next dividend will be S2. 10 per share, and the constant growth of dividends is expected indefinitely. If the stock sells for $$7.07 per share, what is the constant growth rate of dividendls? (6 points) Problem 3. Tomeco Co. has a WACC of 12 percent. Its debt sells at a yield to maturity of 6 percent, and its tax rate is 30 percent. Its cost of equity is 14 percent. What is Tomeco's Equity Total Assets ratio? (6 points)

Explanation / Answer

2.

R = Risk free rate + Beta*Risk premium

R = 3% + .78*6% = 7.68%

Let, dividend growth rate = g

Then, as per the constant dividend growth model,

Stock price = D1/(R-g)

57.07 = 2.1/(.0768 – g)

g = .0768 - 2.1/57.07

g = 4%

So, dividend growth rate is 4%.

3.

E = equity

D = debt

A = total assets

WACC = (D/A)*6%*(1-30%) + (E/A)*14%

12% = (D/A)*.042 + (E/A)*.14

12% = ((A-E)/A)*.042 + (E/A)*.14

.12 = .042*A/A - .042*E/A + .14*E/A

.12 - .042 = .098*E/A

E/A = (.12-.042)/.098

Equity / total assets = .795 or .8 or 80%

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