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
• globalization • arbitrage. • international trading. 5. Which of the following is true about bonds? • They have a fixed maturity, and they pay an amount equal to the maturity value times the coupon rate each year.
The arithmetic average of CAPM and DDM is (7.82% + 10.3%)/2 = 9.05% Cost of Debt. The weighted average cost of debt was based on assumptions provided in this case. The data provided is in green below. Market value is calculated as the book value adjusted to market based on the current Bond Price. The cost of debt is based on both market price and yield to maturity.
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.
If Krell is expected to pay a dividend of $0.88 this year, and its stock price is expected to grow to $23.54 at the end of the year, what is Krell’s dividend yield and equity cost of capital? Answer: Dividend Yield = Dividend / Share price = 0.88/22 = 4% Capital Gain Rate = (End of year stock price – Share price today) / Share price today = (23.54 – 22) / 22 = 7% Total expected return (Equity cost of capital) = 4% + 7% = 11% 9-5 No Growth Company NoGrowth Corporation currently pays a dividend of $2 per year, and it will continue to pay this dividend forever. What is the price per share if its equity cost of capital is 15% per year? Answer: Assume: dividends are paid at the end of the year Stock pays a total of $2.00 in dividends per year. 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.
For a preferred stock with the dividend amount of $2.00 each quarter, what is the PV of it with an annual discount rate of 8%? If the price of the preferred stock is $80, what is the yield (ROI, APR) of this security? a. $60, 8% b. $80, 8% c. $60, 10% d. $80, 10% e. $100, 10% Answer: e V0 = D/k = 8/0.08 = $100.
Add a graph of the resulting exposure to CAD. c. Assume now that GM decides to hedge 100% of its CAD exposure using a three-month forward. Add a graph of the resulting exposure to CAD. 4. d. Assume now that GM decides to hedge 50% of its transactional exposure using three-month call options on CAD with the expiration price of 1.5667. Add a graph of the resulting exposure to CAD.
Using the 20-year T-Bond yield as the risk-free rate, the average beta of past 6 years, and the geometric mean of historical risk premium in the CAPM model equation to get the cost of equity (see Appendix A 1 for detail). CAPM = Rf + β*RP = 5.74% + 0.8 * 5.90% = 10.46% 3.
? How does systematic risk differ from unsystematic risk? What is meant by the Capital Asset Pricing Model? Describe how it relates to expected return and risk. Find the real return on the following investments: Stock Nominal Return Inflation A 10% 3% B 15% 8% C -5% 2% ?
A conservative model representing current company growth, based on a current calculated growth rate of 3.39%, used a forecasted Cost of Goods Sold (CGS) and Selling, General, Administrative (SGA) of 65.58% and 22.01% of sales respectively (See Exhibit 1a). A more robust growth rate of 6% with a gradual increase over four years was used based on current industry growth and Cooper’s anticipated goals for Nicholson. A rate of 65% and 19% of sales were used for CGS and SGA in this model (See Exhibit 1b.). We feel this comparison helps illustrate potential in the company. EXHIBIT 1.a (Future Cash Flows from Operations) OPERATIONS ($ MILLIONS) 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 Sales Growth 3.39% 3.39% 3.39% 3.39% 3.39% 3.39% 3.39% 3.39% 3.39% 3.39% 3.39% Net sales 55.3 57.18 59.11 61.12 63.19 65.34 67.55 69.84 72.21 74.66 77.19 Cost of goods sold (67.58% of