Essay on Corporate Fiance Assignment Solution

2220 Words Mar 2nd, 2015 9 Pages
Corporate Finance ADM 3350 M & P (Winter 2015) Assignment 1 Due Date: February 23, 2015 Question 1 (5 Marks) Varta Inc. has just issued a dividend of $1.50 per share on its common stock. The company paid dividends of $1.10, $1.15, $1.25, and $1.37 per share in the last four years. The stock currently sells for $48. a. What is your best estimate of the company's cost of equity capital using the arithmetic average growth rate in dividends? b. What if you use the geometric average growth rate? Solution: (3 + 2 = 5 Marks)
Part a. Period 1 2 3 4 5 dividend 1.1 1.15 1.25 1.37 1.5 Average growth (Arithmetic) growth 0.045 0.087 0.096 0.095 Growth = (P2 - P1)/P1

0.081

RE = D1/P0 + g = (D0 (1 + g))/P0 + g RE = 11.46%

Part b. We can get the
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Dividend rate = 10% = 0.1 Total book value = $1,000,000; No. of preferred share = total book value / par value = 1,000,000/100 = 10,000 Price of preferred share = Dividend / Cost of preferred share = 10*0.1/0.08 = $125 Total market value of preferred share = $125 * number of pref. share = 125* 10000 = 1,250,000

Common Share Value: Total market value of common share = price per share * number of pref. share = $25 * 100000 = $2,500,000

(Note: retained earnings information is irrelevant here) Part b. Total market value = debt + pref. equity + Common equity = 1,147,200 + 1,250,000 + 2,500,000 = $4,897,200

Market value proportions of: Debt = $1,147,200 / $4,897,200 = 23.4% Pref. Share = $1,250,000 / $4,897,200 = 25.5% Common equity = $2,500,000 / $4,897,200 = 51.1%

Question 3 (10 Marks) Given the following information

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