Last year a Japanese engineering materials corporation, Yamachi Inc., purchased U.S. Treasury bonds that returned an average of 4% per year. Now, Euro bonds are being purchased with a realized average return of 3.9% per year. The volatility factor of Yamachi stock last year was 1.10; but, it has increased this year to 1.18. Other publicly traded stocks in this same business arena are paying an average dividend of 5.1% per year. Determine the cost of equity capital for each year and explain why the increase or decrease seems to have occurred.

Last year a Japanese engineering materials corporation, Yamachi Inc., purchased U.S. Treasury bonds that returned an average of 4% per year. Now, Euro bonds are being purchased with a realized average return of 3.9% per year. The volatility factor of Yamachi stock last year was 1.10; but, it has increased this year to 1.18. Other publicly traded stocks in this same business arena are paying an average dividend of 5.1% per year. Determine the cost of equity capital for each year and explain why the increase or decrease seems to have occurred.

Financial Reporting, Financial Statement Analysis and Valuation

8th Edition

ISBN:9781285190907

Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Chapter14: Valuation: Market-based Approach

Section: Chapter Questions

Problem 21PC

See similar textbooks

Similar questions

During the year Honda Motor Company shares went from ¥9,010 to ¥11,210, while paying a dividend of ¥60. At the same time, the exchange rate went from $1 = ¥145 to $1 = ¥120. What was the total dollar return, in percent, on Toyota stock for the year? Explain in not more than three sentences whether the return was driven more by the stock market or by the exchange rate?
Ivanhoe, Inc., is a mature firm that is growing at a constant rate of 5.62 percent per year. The last dividend that the firm paid was $1.60 per share. If dividends are expected to grow at the same rate as the firm and the required rate of return on Ivanhoe’s stock is 14 percent, what is the market value of the company’s stock? (Round answer to 2 decimal places, e.g. 52.75.) Market value of the company’s stock_____
Assume that over the last several decades the total annual returns of large-company common stocks averaged 12.1% small company stocks averaged 16.5% long-term government bonds averaged 6% and us tbills averaged 3.4%. What was the average excess return earned by long-term government bonds and small company stocks respectively?
Oriole, Inc., is a mature firm that is growing at a constant rate of 7.15 percent per year. The last dividend that the firm paid was $1.20 per share. If dividends are expected to grow at the same rate as the firm and the required rate of return on Oriole’s stock is 12 percent, what is the market value of the company’s stock? (Round answer to 2 decimal places, e.g. 52.75.)
Ornaments, Inc., is an all-equity firm with a total market value of $608,000 and 26,200 shares of stock outstanding. Management believes the earnings before interest and taxes (EBIT) will be $88,850 if the economy is normal. If there is a recession, EBIT will be 24 percent lower, and if there is a boom, EBIT will be 35 percent higher. The tax rate is 35 percent. What is the EPS in a recession? Round to two places past the decimal point and format as "X.XX"
BHP Billiton, an Australian company, just paid $0.85 as a dividend, which is expected to grow at 6.0 per cent. Its most recent stock price is $82. Further, the company has a debt issue outstanding with 23 years to maturity that is quoted at 95 per cent of face value. The issue makes semiannual payments and has an embedded cost of 6 per cent annually. It considers a debt-equity ratio of 0.60 and a 25 per cent corporate tax rate. In this year, the company has an EBIT of $3.15 million. Depreciation, the increase in net working capital, and capital spending were $265,000, $105,000, and $495,000, respectively. Therefore, you expect that over the next five years, EBIT will grow at 15 per cent per year, depreciation and capital spending will grow at 15 per cent per year, and NWC will grow at 10 per cent per year. It also has $19.5 million in debt and 400,000 shares outstanding. After Year-5, the adjusted cash flow from assets is expected to grow at 3.50 per cent indefinitely. Answer the…
BHP Billiton, an Australian company, just paid $0.85 as a dividend, which is expected to grow at 6.0 per cent. Its most recent stock price is $82. Further, the company has a debt issue outstanding with 23 years to maturity that is quoted at 95 per cent of face value. The issue makes semiannual payments and has an embedded cost of 6 per cent annually. It considers a debt-equity ratio of 0.60 and a 25 per cent corporate tax rate. In this year, the company has an EBIT of $3.15 million. Depreciation, the increase in net working capital, and capital spending were $265,000, $105,000, and $495,000, respectively. Therefore, you expect that over the next five years, EBIT will grow at 15 per cent per year, depreciation and capital spending will grow at 15 per cent per year, and NWC will grow at 10 per cent per year. It also has $19.5 million in debt and 400,000 shares outstanding. After Year-5, the adjusted cash flow from assets is expected to grow at 3.50 per cent indefinitely. Answer the…
BHP Billiton, an Australian company, just paid $0.85 as a dividend, which is expected to grow at 5.0 per cent. Its most recent stock price is $82. Further, the company has a debt issue outstanding with 23 years to maturity that is quoted at 105 per cent of face value. The issue makes semiannual payments and has an embedded cost of 6 per cent annually. It considers a debt-equity ratio of 0.60 and a 30 per cent corporate tax rate. In this year, the company has an EBIT of $3.15 million. Depreciation, the increase in net working capital, and capital spending were $265,000, $105,000, and $495,000, respectively. Therefore, you expect that over the next five years, EBIT will grow at 15 per cent per year, depreciation and capital spending will grow at 20 per cent per year, and NWC will grow at 10 per cent per year. It also has $19.5 million in debt and 400,000 shares outstanding. After Year-5, the adjusted cash flow from assets is expected to grow at 3.50 per cent indefinitely. What is…
BHP Billiton, an Australian company, just paid $0.85 as a dividend, which is expected to grow at 5.0 per cent. Its most recent stock price is $82. Further, the company has a debt issue outstanding with 23 years to maturity that is quoted at 105 per cent of face value. The issue makes semiannual payments and has an embedded cost of 6 per cent annually. It considers a debt-equity ratio of 0.60 and a 30 per cent corporate tax rate. In this year, the company has an EBIT of $3.15 million. Depreciation, the increase in net working capital, and capital spending were $265,000, $105,000, and $495,000, respectively. Therefore, you expect that over the next five years, EBIT will grow at 15 per cent per year, depreciation and capital spending will grow at 20 per cent per year, and NWC will grow at 10 per cent per year. It also has $19.5 million in debt and 400,000 shares outstanding. After Year-5, the adjusted cash flow from assets is expected to grow at 3.50 per cent indefinitely. What is…
BHP Billiton, an Australian company, just paid $0.85 as a dividend, which is expected to grow at 5.0 per cent. Its most recent stock price is $82. Further, the company has a debt issue outstanding with 23 years to maturity that is quoted at 105 per cent of face value. The issue makes semiannual payments and has an embedded cost of 6 per cent annually. It considers a debt-equity ratio of 0.60 and a 30 per cent corporate tax rate. In this year, the company has an EBIT of $3.15 million. Depreciation, the increase in net working capital, and capital spending were $265,000, $105,000, and $495,000, respectively. Therefore, you expect that over the next five years, EBIT will grow at 15 per cent per year, depreciation and capital spending will grow at 20 per cent per year, and NWC will grow at 10 per cent per year. It also has $19.5 million in debt and 400,000 shares outstanding. After Year-5, the adjusted cash flow from assets is expected to grow at 3.50 per cent indefinitely. Answer the…
An analyst is trying to estimate the intrinsic value of VN Co. that has a weighted average cost of capital at 10%. The estimated free cash flows for the company for the following years are: · Year 1 P3,000 · Year 2 P4,000 · Year 3 P5,000 The analyst estimates that after three years, free cash flow will grow at a constant annual percentage of 6%. What is the total intrinsic value of the company’s common stock if combined debt and preferred stock has a P25,000 market value? A. 98,556 B. 109,339 C. 78,310 D. 84,339
Assume that you are on the financial staff of Vanderheiden Inc., and you have collected the following data: The yield on the company’s outstanding bonds is 8.0%, its tax rate is 35%, the next expected dividend is $0.80 a share, the dividend is expected to grow at a constant rate of 7.00% a year, the price of the stock is $17.50 per share, the flotation cost for selling new shares is F = 8%, and the target capital structure is 30% debt and 70% common equity. What is the firm's WACC, assuming it must issue new stock to finance its capital budget?