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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

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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