PRIN.OF CORPORATE FINANCE >BI<
12th Edition
ISBN: 9781260431230
Author: BREALEY
Publisher: MCG CUSTOM
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Chapter 13, Problem 7PS
Summary Introduction
To discuss: Whether the stock price will increase or decrease.
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(Measuring growth) Solarpower Systems earned
$20
per share at the beginning of the year and paid out
$9
in dividends to shareholders (so,
D0=$9)
and retained
$11
to invest in new projects with an expected return on equity of
19
percent. In the future, Solarpower expects to retain the same dividend payout ratio, expects to earn a return of
19
percent on its equity invested in new projects, and will not be changing the number of shares of common stock outstanding.
a. Calculate the future growth rate for Solarpower's earnings.
b. If the investor's required rate of return for Solarpower's stock is
15
percent,
what would be the price of Solarpower's common stock?
c. What would happen to the price of Solarpower's common stock if it raised its dividends to
$13
and then continued with that same dividend payout ratio permanently? Should Solarpower make this change? (Assume that the investor's required rate of return remains at
15
percent.)
d. What would happened to…
(Measuring growth) Solarpower Systems earned
$20
per share at the beginning of the year and paid out
$8
in dividends to shareholders (so,
D0=$8)
and retained
$12
to invest in new projects with an expected return on equity of
21
percent. In the future, Solarpower expects to retain the same dividend payout ratio, expects to earn a return of
21
percent on its equity invested in new projects, and will not be changing the number of shares of common stock outstanding.
a. Calculate the future growth rate for Solarpower's earnings.
b. If the investor's required rate of return for Solarpower's stock is
13
percent,
what would be the price of Solarpower's common stock?
c. What would happen to the price of Solarpower's common stock if it raised its dividends to
$12
and then continued with that same dividend payout ratio permanently? Should Solarpower make this change? (Assume that the investor's required rate of return remains at
13
percent.)
d. What would happened…
Chartreuse County Choppers Inc. isexperiencing rapid growth. The company expects dividends to grow at 25 percentper year for the next 11 years before leveling off at 6 percent into perpetuity. Therequired return on the company’s stock is 12 percent. If the dividend per share justpaid was $1.74, what is the stock price?
Chapter 13 Solutions
PRIN.OF CORPORATE FINANCE >BI<
Ch. 13 - Prob. 1PSCh. 13 - Prob. 2PSCh. 13 - Market efficiency True or false? The...Ch. 13 - Prob. 4PSCh. 13 - Prob. 5PSCh. 13 - Behavioral finance True or false? a. Most managers...Ch. 13 - Prob. 7PSCh. 13 - Prob. 8PSCh. 13 - Prob. 9PSCh. 13 - Market efficiency How would you respond to the...
Ch. 13 - Market efficiency Respond to the following...Ch. 13 - Market efficiency evidence Which of the following...Ch. 13 - Prob. 13PSCh. 13 - Prob. 14PSCh. 13 - Prob. 15PSCh. 13 - Market efficiency implications What does the...Ch. 13 - Prob. 17PSCh. 13 - Prob. 18PSCh. 13 - Prob. 19PSCh. 13 - Prob. 20PSCh. 13 - Prob. 21PSCh. 13 - Prob. 22PSCh. 13 - Prob. 23PS
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- Conroy Consulting Corporation (CCC) has a current dividend of D0 = $2.5. Shareholders require a 12% rate of return. Although the dividend has been growing at a rate of 30% per year in recent years, this growth rate is expected to last only for another 2 years (g0,1 = g1,2 = 30%). After Year 2, the growth rate will stabilize at gL = 7%. What is CCC’s stock worth today? What is the expected stock price at Year 1? What is the Year 1 expected (1) dividend yield, (2) capital gains yield, and (3) total return? What is its expected dividend yield for the second year? The expected capital gains yield? The expected total return?arrow_forwardCALCULATING 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?arrow_forwardWACC Estimation On January 1, the total market value of the Tysseland Company was $60 million. During the year, the company plans to raise and invest $30 million in new projects. The firm’s present market value capital structure, shown here, is considered to be optimal. There is no short-term debt. New bonds will have an 8% coupon rate, and they will be sold at par. Common stock is currently selling at $30 a share. The stockholders’ required rate of return is estimated to be 12%, consisting of a dividend yield of 4% and an expected constant growth rate of 8%. (The next expected dividend is $1.20, so the dividend yield is $1.20/$30 = 4%.) The marginal tax rate is 40%. In order to maintain the present capital structure, how much of the new investment must be financed by common equity? Assuming there is sufficient cash flow for Tysseland to maintain its target capital structure without issuing additional shares of equity, what is its WACC? Suppose now that there is not enough internal cash flow and the firm must issue new shares of stock. Qualitatively speaking, what will happen to the WACC? No numbers are required to answer this question.arrow_forward
- Navel County Choppers, Inc., is experiencing rapid growth. The company expects dividends to grow at 17 percent per year for the next 10 years before leveling off at 4 percent into perpetuity. The required return on the company’s stock is 12 percent. If the dividend per share just paid was $2.17, what is the stock price?arrow_forwardDD Plc is expected to declare earnings per share of £1.60 next year. The company historically has reinvested 30 per cent of its earnings back into the business and earns a rate of return of 14 per cent on reinvested earnings. If the current share price is £16.00 and investors demand a rate of return of 12 per cent on this stock estimate the proportion of the company's stock price that is due to the present value of growth opportunities (PVGO). (Use two decimals and input value in percentage terms, e.g. if your answer is 10.00% then input 10.00).arrow_forwarda) Elixir Drug Company is enjoying rapid growth from the introduction of its new backrub ointment. The dividend for a share of Elixir's stock a year from today will be K1.15. During the next four years, the dividend will grow at 15 percent per year, will drop to 12 percent for another three years due to tough competitors. After that, growth will be equal to 10 percent per year indefinitely. thereafter What is the current value of a share of stock if the required return is 15 percent? (b) Geneva Electronics Co. issues a K1,000 face value, eight-year zero coupon bond. What is the yield to maturity on the bond if the bond is offered at K627? [Assume annual compounding]arrow_forward
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