Problems. 5 points each. Show your work in order to be considered for partial cr

Question

Problems. 5 points each. Show your work in order to be considered for partial credit.

1.   The board of Divine Purple, Inc. just declared a dividend of $2.90 per share. The current price of a share of Divine is $65.00. The average stockholder is in the 30% tax bracket. The stock is about to go “ex-dividend.” What would you expect the share price to be after the ex-dividend date? ____________

2. Use the Security Market Line method and the following information to compute cost of equity:

Risk Premium 6.3%

Beta 1.05

Risk free rate 2%

Cost of Equity _______________________

3. The Bubble Club is an all equity firm that is thinking of restructuring to include some debt. The money will be used to repurchase Bubble Club shares at $32.00 per share. There are 21,875 shares outstanding at this time. Currently, the balance sheet shows $700,000 in equity and assets, and no debt. EBIT is predicted to be $430,000 next year. Bubble is in the 35% tax bracket. If the company borrows $265,000 at 7% interest, what will the earnings per share be under the current structure and the proposed structure?

Current EPS ________________

Proposed EPS _______________

Should they do the restructuring? ______________

Yes or no

4.   Elegant Tuxedo Rental has 350,000 in equity and 200,000 in debt. Their flotation costs of equity and debt are 2.7% and 3.3%, respectively. What is the weighted average flotation cost for Elegant? __________________

5. Balance Time Management Company has two bonds outstanding. Bond A has a $1,000 face value, a coupon rate of 5% that pays semiannually, three years to maturity and a current price (in the WSJ) of 102. Bond B has a $1,000 face value, pays interest annually with a coupon rate of 6%, has 12 years to maturity and is currently showing in the WSJ at 93. There are 6500 of Bond A and 3200 of Bond B outstanding.

YTM on Bond A ____________

YTM on Bond B ____________

Percentage Weight Bond A _____________

Percentage Weight Bond B _____________

Weighted Average Cost of debt __________________________

6.   Careers for Women, Inc. currently has 20,000 shares outstanding at a price of $81.00 per share. They are planning to do a 3-1 split. Josiah owns 612 shares before the split.

What is the total value of Josiah’s investment in CWI BEFORE  the split? _______________

How many shares will Josiah own AFTER the split? ________________________

What will each share be worthAFTER the split? ________________________

What will be the total value of Josiah’s investment in CWI AFTER the split? _______________

7.   Donna just inherited 500 shares of preferred stock from her grandmother. The attorney for the estate told Donna that her inheritance was worth $36,000. If the annual dividend is $2.95 per share, what is the company’s cost of preferred stock?

Cost of preferred stock ______________________

8. Devon has a portfolio in which he owns 78 shares of stock A, 95 shares of stock B, and 116 shares of stock C. The current prices of the three stocks are $55, $39, and $48 respectively. Devon has computed the returns on the three stocks and has found them to be 8%, 6% and 4.5%, respectively. What is Devon’s portfolio return?

Portfolio return___________________

9. Green Snack Company has the following amounts and rates. Compute the Weighted Average Cost of Capital for Green Snack Company.

Common Stock 725,000

Preferred Stock 215,000

Debt 900,000

Cost of equity    14%

Cost of preferred     7%

Cost of Debt     9%

Tax rate    35%

WACC ___________________

Explanation / Answer

1) dividend , d = $2.90

current price of share , p = $65

tax rate , t = 30% = 0.30

share price after the ex-dividend rate = p-(d*(1-t)) = 65*-(2.90*(1-0.30)) = 65-2.03 = $62.97

2)

Risk Premium = r = 6.3%

Beta = b = 1.05

Risk free rate = r1 = 2%

cost of equity = r1 + (b*r) = 2 + (1.05*6.3) = 2+6.615 = 8.615% or 8.62% ( rounding off to 2 decimal places)

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