Compute the payback period for a project with the following cash flows, if the company's discount rate is 12%. Initial outlay = $450 Cash flows: Year 1 = $325 Year 2 = $65 Year 3 = $100 • 3.17 years • 2.6 years • 2.88 years • 3.43 years Want help? Click to download FIN 370 7. Which of the following best describes why cash flows are utilized rather than accounting profits when evaluating capital projects? • Cash flows have a greater present value than accounting profits.
The formula for DDM is: R= (Div/P) +G Where P= Share Price, Div= Next Year’s Dividend, G=Constant annual dividend growth rate. For PepsiCo, the price at 12/31/10 was $64.36 (per Yahoo Finance), the estimated 2011 dividends was $1.46*, and the growth rate was 8%*. (* Calculated in Case 3). Using these figures in the DDM formula gives Pepsi Co a cost of capital of 10.3%. The arithmetic average of CAPM and DDM is (7.82% + 10.3%)/2 = 9.05% Cost of Debt.
Valuing this dividend as a perpetuity: P = $2.00 / 0.15 = $13.33 9-6 Value of Operations of Constant Growth Summit Systems will pay a dividend of $1.50 this year. If you expect Summit’s dividend to grow by 6% per year, what is its price per share if its equity cost of capital is 11%? Answer: Price per share = 1.50 / (11% – 6%) = $30
Find the real return on the following investments: Stock Nominal Return Inflation A 10% 3% B 15% 8% C -5% 2% ? Find the real return, nominal after-tax return, and real after-tax return on the following: Stock Nominal Return Inflation Tax Rate X 13.5% 5.0% 15% Y 8.7% 4.7% 25% Z 5.2% 2.5% 28% How are industry-operating differences reflected in a firm’s financial statements? week 6 Assignment
During 10 years, the investors will reinvest all the cash flows into the company, so maintaining the growth of 7.45% each year. The return on equity used for the valuation is the rate of 7.45% which is the return on PacifiCorp equity on 2005. For the cost of equity, the capital would be invested in MidAmerican if the company did not take the acquisition. Therefore, I consider the rate of return on MidAmerican on 2004 (5.72%) as the cost of equity of PacifiCorp. Dividing the present value of future cash flows by the cost of the investment indicates that every dollar invested buys securities worth $1.18.
c. Money market securities must have an original maturity of one year or less. Given that price movements resulting from interest rate changes are smaller for short-term securities, the short-term maturity of money market instruments helps lower the risk that interest rate changes will significantly affect the security’s market value and price. 2. What is the difference between a discount yield and a bond equivalent yield? Which yield is used for Treasury bill quotes?
cost of equity =I used the 20 year at 5.74%+Geometric mean=5.9%x most recent beta .69=9.81% Cost of Debt I used Yield to maturity to find cost of debt From Exhibit 4 PV= 95.60 N=40 (20years x 2) since its paid semiannually Pmt=-3.375 (6.75/2) FV=-100 Comp I = 3.58% (semiannual) 7.16% (annual) After tax cost of debt = 7.16%(1-38%) = 4.44% E = market value of the firm's equity To find Market value of Equity you multiply share price by amount of shares $42.09x273.3= 11503. D = market value of the firm's debt I valued book value of debt at 1,291 Then divide 11503/(11503+1291)=89.9 so the weight for debt is 10.1 percent When I calculated WACC 4.44%x.101+9.81%x.899= 9.27% Cohen made a few mistakes when she calculated her WACC. First, she used historical data in
265). An increase in the real investment or in components of consumption will cause a rise in the real GDP and a decrease in real spending will cause a decrease in the real GDP. To calculate the multiplier one takes 1 and divides it by 1 minus the marginal propensity to consume, which is equal to one divided by the marginal propensity to save. Therefore, the “smaller the marginal propensity to save, the larger the multiplier” and the “larger the marginal propensity to consume, the larger the multiplier” (Miller, 2012, pg. 266).
Price = $1,000 x 0.3855 + $1,000 x 7.5% x 6.1446 Price = $385.50 + $460.85 Price = $846.35 b. If after six years interest rates are still 10 percent, what should be the price of the bond? Price = $1,000 x 0.6830 + $1,000 x 7.5% x 3.1699 Price = $683 + $237.74 Price = $920.74 c. Even though interest rates did not change in a and b, why did the price of the bond change The price of the bond changed because certain time period passed. d. Change the interest in a and b to 6 percent and rework your answers. Even though the interest rate is 6 percent in both calculations, why are the bond prices different?
Explain why the yield on a convertible bond is lower than the yield on an otherwise identical bond without a conversion feature. The option to convert the bond into stock is valuable, hence its price will be higher and its yield lower. 4. You own a bond with a face value of $10,000 and a conversion ratio of 450. What is the conversion price?