The risk free rate of return is 5% and the expected return on the market portfol

Question

1. The risk free rate of return is 5% and the expected return on the market portfolio is 14%. Broadways Inc. has a beta of 1.5 and a standard deviation of returns of 20%. Broadways' marginal tax rate is 35%. Analysts expect Starship's net income to grow by 7.5% per year for the next 5 years. Using the Capital Asset Pricing Model, what is Starship Enterprises' cost of retained earnings?
2. Vega Inc. stock is selling for $20 and their investment bank told them flotation costs are 9.0%.  Vega announced it will offer $0.35 dividend in one year and will grow by 3.0% a year.  What is Vega%u2019s cost of issuing new stock?
3. Lavin's Lighting has decided it is going to offer preferred stock that is going to pay $0.70 a year.  Lavin's Lighting  found out their investment bank should sell the preferred stock for $35 but the floatation costs will run about 12% of the sale price.  What is the cost of this preferred stock?  (Round to the second decimal place)
4. Book World%u2019s management wants to determine its WACC.  If the firm just be became a business today and currently has $20 million of assets that are financed by $7,500,000 of preferred stock, $5,000,000 in bonds and $7,500,000 in equity.  All securities were issued today and the firm%u2019s tax rate is 35%.  The preferred stock will pay $1 annually and was sold for $17.50 with a flotation cost of $0.75.  The firm%u2019s bonds were sold for $1000 with a flotation cost of $25.  The bonds are for 10 years and offer a coupon of 8.25%, paid annually.  The firm%u2019s stock was sold for $9 with a flotation cost of 5%.  The firm already announced its first dividend will be paid in one year and will be $0.75 and will grow annually at a growth rate of 5%.  What is the firm%u2019s WACC?

Explanation / Answer

1.cost of retained earning=5%+(14-5)*1.5=18.5%

2. cost of issuing new stock= 0.35/18.2)+0.03=4.92%

3. cost of prefrd stock= 0.7/(35-12%*35)= 2.27%

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.