Teffla Electric Lawn Mowers is a young, but growing company. Analysts expect it to reach maturity during the year 2028. One analyst forecasts the companywill start paying annual dividends at the end of 2028 for the first time. She expects a dividend of $3.50 per share on December 31, 2028, and dividends togrow at 4% per year from then on. The appropriate discount rate for Teffla shares is 11% and it has 150 million shares outstanding.a) On January 1, 2028, what is the fair value of Teffla shares based on the analyst's prediction?b) What is the fair value of Teffla shares as of January 1, 2023?The same analyst also predicts that in 2024, the company will sell their battery technology division for $1.05 billion dollars. The proceeds from the sale willbe distributed as a one-time bonus dividend on December 31, 2024.c)What is you answer to question b) now?

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Answered: a) On January 1, 2028, what is the fair…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter7: Common Stock: Characteristics, Valuation, And Issuance

Section: Chapter Questions

Problem 10P

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CALCULATING THE WACC Here is the condensed 2019 balance sheet for Skye Computer Company (in thousands of dollars): Skyes earnings per share last year were 3.20. The common stock sells for 55.00. last years dividend (D0) was 2.10, and a flotation cost of 10% would be required to sell new common stock. Security analysts are projecting that the common dividend will grow at an annual rate of 9%. Skyes preferred stock pays a dividend of 3.30 per share, and its preferred stock sells for 30.00 per share. The firms before-lax cost of debt is 10%, and its marginal tax rate is 25%. The firms currently outstanding 10% annual coupon rate, long-term debt sells at par value. The market risk premium is 5%, the risk-free rate is 6%, and Skyes beta is 1.516. The firms total debt, which is the sum of the companys short-term debt and long-term debt, equals 1.2 million. a. Calculate the cost of each capital component, that is, the after-tax cost of debt, the cost of preferred stock, the cost of equity from retained earnings, and the cost of newly issued common stock. Use the DCF method to find the cost of common equity. b. Now calculate the cost of common equity from retained earnings, using the CAPM method. c. What is the cost of new common stock based on the CAPM? (Hint: Find the difference between r1 and rs as determined by the DCF method, and add that differential to the CAPM value for rs.) d. If Skye continues to use the same market-value capital structure, what is the firms WACC assuming that (1) it uses only retained earnings for equity and (2) if it expands so rapidly that it must issue new common stock?
CEPS Group announced today that it will begin paying annual dividends next year. The first dividend will be OMR 0.31 a share. The following dividends will be OMR 0.35, OMR 0.42, OMR 0.46, and OMR 0.57 a share annually for the following 4 years, respectively. After that, dividends are projected to increase by 2 percent per year. How much are you willing to pay to buy one share of this stock today if your desired rate of return is 10.5 percent?
XYZ Company announced today that it will begin paying annual dividends next year. The first dividend will be $0.1 a share. The following dividends will be $0.2, $0.3, and $0.4 a share annually for the following 3 years, respectively. After that, dividends are projected to increase by 3 percent per year. How much are you willing to pay to buy one share of this stock today if your desired rate of return is 10%?

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