967 WordsNov 25, 20124 Pages

FIN 515 WEEK 4 HOMEWORK ASSIGNMENT
(7–2)
Constant Growth Valuation
Boehm Incorporated is expected to pay a $1.50 per share dividend at the end of this year (i.e., D1 = $1.50). The dividend is expected to grow at a constant rate of 7% a year. The required rate of return on the stock, rs, is 15%. What is the value per share of Boehm’s stock?
For this problem we can use the formula from the book P=d1(R-G) to find the price. We just need to plug in the values... so, 1.5/(8% [15-7]). The value is 18.75.
(7–4)
Preferred Stock Valuation
Nick’s Enchiladas Incorporated has preferred stock outstanding that pays a dividend of $5 at the end of each year. The preferred sells for $50 a share. What is the stock’s required rate of*…show more content…*

What is the estimated cost of common equity using the CAPM?
For this one, looked to me like we need to use the formula Rs=Rrf+Bi(RPm)... Like the last problem, we are given all the values except one. Plugging-and-chugging again, I got 0.06+0.8*(0.055), came out to 10.4 percent.
(9-7)
WACC
Shi Importer’s balance sheet shows $300 million in debt, $50 million in preferred stock, and $250 million in total common equity. Shi’s tax rate is 40%, rd = 6%, rps = 5.8%, and rs = 12%. If Shi has a target capital structure of 30% debt, 5% preferred stock, and 65% common stock, what is its WACC?
So, for this problem we need to find the WACC which can be found by the formula (Wd)*(Rd)*(1-T)+(Wps)*(Rps)+(Wce)(Rs)... We are again given most of the values, so it’s plug-and-chug from here on, pretty much. Debt is 0.30, PS is 0.05, Equity is 0.65, Rd is 0.06, T is 0.40, Rps is 0.058, and Rs is 0.12... So when plugged it looks like: (0.30*0.06*(1-0.40))+0.05*0.058+0.65*0.12, and that came out to 9.17

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