Finance Calculations

Assignment 5

For a full credit in problem 2-10, you should show your calculation.

1. Which one of the following is not directly related to the features of common stocks?

a. Common stock represents the ownership b. Ownership implies control.

c. Stockholders elect directors. d. Directors elect management

e. Management’s goal is to minimize the cost.

2. Which one is the cost of preferred stock, calculated from the data below?

Data: A 10%, $1,000 par value, annually dividend, perpetual preferred stock sells for $1,111.

3. You were recently hired by Hubbard Darren Inc. to estimate its cost of common equity. You obtained the following data: D1 = $1.00; P0 = $42.50; g = 5.00% (constant). What is the cost of equity raised by selling new common stock? (hint: use rs = (D1/P0) X100+(g) or P rs = (D1/P0) X100+(P1-P0)/P0 X100)

4. The Edward Company is expected to pay a dividend of D1 = $1.00 per share at the end of the year, and that dividend is expected to grow at a constant rate of 2.00% per year in the future. The company’s beta is 1.15, the market risk premium is 5.50%, the expected market return is 8%, and the risk-free rate is 4.00%. What is the required rate of return, rs?

5. The Edward Company is expected to pay a dividend of D1 = $1.00 per share at the end of the year, and that dividend is expected to grow at a constant rate of 2.00% per year in the future. The company’s beta is 1.15, the market risk premium is 5.50%, and the risk-free rate is 4.00%. What is the company’s current stock price? (Hint: use rs=10.325%)

6. The Edward Company is expected to pay a dividend of D1 = $1.00 per share at the end of the year, and that dividend is expected to grow at a constant rate of 2.00% per year in the future. The company’s beta is 1.15, the market risk premium is 5.50%, and the risk-free rate is 4.00%. What is the Dividend yield?

7. The Edward Company is expected to pay a dividend of D1 = $1.00 per share at the end of the year, and that dividend is expected to grow at a constant rate of 2.00% per year in the future. The company’s beta is 1.15, the market risk premium is 5.50%, the expected market return is 9.5%, and the risk-free rate is 4.00%. What is the stock’s expected value, P1 one year from now? (Hint: use rs=10.325%)

8. The Edward Company is expected to pay a dividend of D1 = $1.00 per share at the end of the year, and that dividend is expected to grow at a constant rate of 2.00% per year in the future. The company’s beta is 1.15, the market risk premium is 5.50%, the expected market return is 9.5%, and the risk-free rate is 4.00%. What is the capital gain yield?

9. The Edward Company is expected to pay a dividend of D1 = $1.00 per share at the end of the year, and that dividend is expected to have a negative and constant growth rate, -4% per year in the future. The company’s beta is 1.15, the market risk premium is 5.50%, the expected market return is 9.5%, and the risk-free rate is 4.00%. What is the company’s current stock price? (Hint: use rs=10.325%)

10. The Edward Company is expected to pay a dividend of D1 = $1.00 per share at the end of the year, and that dividend is expected to have a negative and constant growth rate, -4% per year in the future. The company’s beta is 1.15, the market risk premium is 5.50%, the expected market return is 9.5%, and the risk-free rate is 4.00%. What is the capital gain yield?