PLEASE SHOW ALL WORK 1) Simpkins Corporation is expanding rapidly, and it does n

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PLEASE SHOW ALL WORK

1) Simpkins Corporation is expanding rapidly, and it does not pay any dividends because it currently needs to retain all of its earnings. However, investors expect Simpkins to begin paying dividends, with the first dividend of $1.00 coming 3 years from today. The dividend should grow rapidly – at a rate of 50% per year – during years 4 and 5. After year 5, the company should grow at a constant rate of 8% per year. If the required on the stock is 15%, what is the value of the stock today?

2) Summerdahl Resort’s common stock is currently trading at $36 a share. The stock is expected to pay a dividend of $3.00 a share at the end of the year (D_1= $3.00), and the dividend is expected to grow at a constant rate of 5% a year. What is its cost of common equity?

3) On January 1, the total market value of the Tysseland Company was $60 million. During the year, the company plans to raise and invest $30 million in new projects. The firm’s present market value capital structure, shown below, is considered to be optimal. There is no short term debt. Debt $30,000,000 Common Equity 30,000,000 Total Equity $60,000,000 New bonds will have an 8% coupon rate, and they will be sold at par. Common stock is currently selling at $30 a share. The stockholder’s required rate of return is estimated to be 12%, consisting of a dividend yield of 4% and an expected constant growth rate of 8%. (The next expected dividend is $1.20, so the dividend yield is $1.20/$30 = 4%). The marginal tax rate is 40%.

a. In order to maintain the present capital structure, how much of a new investment must be financed by common equity?

b. Assuming there is sufficient cash flow for Tysseland to maintain its target capital structure without issuing additional shares of equity, what is its WACC?

c. Suppose now that there is not enough internal cash flow and the firm must issur shares of stock. Qualitatively speaking, what will happen to the WACC? (No numbers are required to answer this question).

4) Davis Industries must choose between a gas-powered and an electric-powered forklift truck for moving materials in its factory. Since both forklifts perform the same function, the firm will choose only one. (They are mutually exclusive investments.) The electric-powered truck will cost more, but it will be less expensive to operate; it will cost $22,000, whereas the gas-powered truck will cost $17,500. The cost of capital that applies to both investments is 12%. The life for both types of truck is estimated to be 6 years, during which time the net cash flows for the electric-powered truck will be $6,290 per year and those for the gas-powered truck will be $5,000 per year. Annual net cash flows include depreciation expenses. Calculate the NPV and IRR for each type of truck, and decide which to recommend.

Explanation / Answer

answer1

the value of the STOCK today IS= 0.87+ 0.76+0.66+0.86+1.125+17.36

the value of the STOCK today IS=> 21.64

ANSWER 2

PRICE = DIVIDEND /(COST OF EQUITY (KE) - GROWTH)

36 = 3/(KE - 5%)

KE = 13.33%

COST OF EQUITY => 13.33%

ANSWER 4 (B)

WACC= [8%(1-40%) *0.5] + [ 12% *0.5]

WACC=> 8.4%

ANSWER 4

ELECTRIC POWER TRUCK

CASH OUTFLOW = 22000 *1 = 22000

CASH INFLOW = 6290 *(PVIAF, 12% ,6)

=> 6290* 4.11 = $25852

NPV =CASH INFLOW - CASH OUTFLOW

=> 25852-22000

NPV OF ELECTRIC POWER TRUCK = $ 3852

GAS POWER TRUCK

CASH OUTFLOW = 17500*1 => 17500

CASH INFLOW => 5000 *(PVIAF, 12% ,6)

=> 5000*4.11 = 20550

NPV =CASH INFLOW - CASH OUTFLOW

=> 20550-17500

NPV OF GAS POWER TRUCK = $ 3050

ELECTRIC POWER TRUCK IS BETTER PROPOSAL

CALCULATION OF IRR

IRR IS A RETURN AT WHICH NPV IS ZERO

FOR ELECTRIC TRUCK

NPV= {Period Cash Flow / (1+R)^T} - Initial Investment

0 = ( 6290 / (1+R )^6) - 22000

IRR = 18%

FOR GAS TRUCK

NPV= {Period Cash Flow / (1+R)^T} - Initial Investment

0 = ( 5000 / (1+R )^6) - 17500

IRR= 17.97%

ELECTRIC POWER TRUCK IS BETTER PROPOSAL

YEARS DIVIDEND AFTER GROWTH PRESENT VALUE@15% 1 1 1 0.87 2 1 1 0.76 3 1 1 0.66 4 1 1.5 0.86 5 1 2.25 1.125 6 1 2.43 [(2.43)/(15-8)%] *0.5 = 17.36

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