Five years of realized returns for CCC are given in the following table. Remember:1. While CCC was started 40 years ago, its common stock has been publicly traded for the past 25years2. The returns on its equity are calculated as arithmetic returns.3. The historical returns for CCC for 2012 to 2015 are:20162012201320142015Stock return13.75%16.50%7.15%9.35%23.10%Given the preceding data, the average realized return on CCC's stock isThe preceding data series representsof CCC's historical returns. Based on this conclusion, thestandard deviation of CCC's historical returns isIf investors expect the average realized return from 2012 to 2016 on CCC's stock to continue into the future, itscoefficient of variation (CV) will be

Calculate the average realized return, standard deviation, and coefficient of variation as follows:

Answered: Five years of realized returns for CCC…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter7: Common Stock: Characteristics, Valuation, And Issuance

Section: Chapter Questions

Problem 8P

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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?
The Castle Company recently reported net profits after taxes of $15.8 million. It has 2.5 million shares of common stock outstanding and pays preferred dividends of $1 million a year. The company’s stock currently trades at $60 per share. Compute the stock’s earnings per share (EPS). What is the stock’s P/E ratio? Determine what the stock’s dividend yield would be if it paid $1.75 per share to common stockholders.
Consider the case of Blue Llama Mining Inc. (BLM): Five years of realized returns for BLM are given in the following table. Remember: 1. While BLM was started 40 years ago, its common stock has been publicly traded for the past 25 years. 2. The returns on its equity are calculated as arithmetic returns. 3. The historical returns for BLM for 2014 to 2018 are: 2014 2015 2016 2017 2018 Stock return 13.75% 9.35% 16.50% 23.10% 7.15% Given the preceding data, the average realized return on BLM’s stock is _____%. The preceding data series represents (a sample / the universe / the population) of BLM’s historical returns. Based on this conclusion, the standard deviation of BLM’s historical returns is ______%. If investors expect the average realized return from 2014 to 2018 on BLM’s stock to continue into the future, its coefficient of variation (CV) will be _______.
The following table gives Foust Company's earnings per share for the last 10 years. The common stock, 8.7 million shares outstanding, is now (1/1/22) selling for $56.00 per share. The expected dividend at the end of the current year (12/31/22) is 45% of the 2021 EPS. Because investors expect past trends to continue, g may be based on the historical earnings growth rate. (Note that 9 years of growth are reflected in the 10 years of data.) Year EPS Year EPS 2012 $3.90 2017 $5.73 2013 4.21 2018 6.19 2014 4.55 2019 6.68 2015 4.91 2020 7.22 2016 5.31 2021 7.80 The current interest rate on new debt is 10%; Foust's marginal tax rate is 25%; and its target capital structure is 45% debt and 55% equity. Calculate Foust's after-tax cost of debt. Round your answer to two decimal places. % Calculate Foust's cost of common equity. Calculate the cost of equity as rs = D1/P0 + g. Do not round intermediate calculations. Round your answer to two decimal places. % Find…
Returns earned over a given time period are called realized returns. Historical data on realized returns is often used to estimate future results. Analysts across companies use realized stock returns to estimate the risk of a stock. Five years of realized returns for Celestial Crane Cosmetics Inc. (Crane Cosmetics) are given in the following table: 2012 2013 2014 2015 2016 Stock return 23.75% 16.15% 28.50% 39.90% 12.35% Also note that: 1. While Crane Cosmetics was started 40 years ago, its common stock has been publicly traded for the past 25 years. 2. The returns on Crane Cosmetics's equity are calculated as arithmetic returns. Given this return data, the average realized return on Celestial Crane Cosmetics Inc.’s stock is . The preceding data series represents of Crane Cosmetics’s historical returns. Based on this conclusion, the standard deviation of Crane Cosmetics’s historical returns is . If investors expect the…
The following table gives Foust Company's earnings per share for the last 10 years. The common stock, 7.6 million shares outstanding, is now (1/1/19) selling for $74 per share. The expected dividend at the end of the current year (12/31/19) is 65% of the 2018 EPS. Because investors expect past trends to continue, g may be based on the historical earnings growth rate. (Note that 9 years of growth are reflected in the 10 years of data.) Year EPS Year EPS 2009 $3.90 2014 $5.73 2010 4.21 2015 6.19 2011 4.55 2016 6.68 2012 4.91 2017 7.22 2013 5.31 2018 7.80 The current interest rate on new debt is 9%; Foust's marginal tax rate is 40%; and its target capital structure is 35% debt and 65% equity. A) Calculate Foust's after-tax cost of debt. Round your answer to two decimal places. % B) Calculate Foust's cost of common equity. Calculate the cost of equity as rs = D1/P0 + g. Do not round intermediate calculations. Round your answer to two decimal places. % C) Find…
The following table gives Foust Company’s earnings per share for the last 10 years.The common stock, 7.8 million shares outstanding, is now (1/1/19) selling for $65.00 pershare. The expected dividend at the end of the current year (12/31/19) is 55% of the 2018EPS. Because investors expect past trends to continue, g may be based on the historicalearnings growth rate. (Note that 9 years of growth are reflected in the 10 years of data.) The current interest rate on new debt is 9%; Foust’s marginal tax rate is 40%, and its targetcapital structure is 40% debt and 60% equity.a. Calculate Foust’s after-tax cost of debt and common equity. Calculate the cost of equityas rs = D1/P0 + g.b. Find Foust’s WACC.Copyright 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).Editorial review has deemed that any suppressed content does not…
Returns earned over a given time period are called realized returns. Historical data on realized returns is often used to estimate future results. Analysts across companies use realized stock returns to estimate the risk of a stock. Five years of realized returns for Falcon Freight Inc. (Falcon) are given in the following table: 2016 2017 2018 2019 2020 Stock return 25.00% 17.00% 30.00% 42.00% 13.00% Also note that: 1. While Falcon was started 40 years ago, its common stock has been publicly traded for the past 25 years. 2. The returns on Falcon's equity are calculated as arithmetic returns. Given this return data, the average realized return on Falcon Freight Inc.’s stock is . The preceding data series represents a sample of Falcon’s historical returns. Based on this conclusion, the standard deviation of Falcon’s historical returns is . If investors expect the average realized return on Falcon Freight Inc.’s stock from…

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