How companies make financial decisions
Question # 00574443
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Updated on: 08/14/2017 10:10 AM Due on: 08/14/2017
Calculate the following problems and provide an overall summary of how companies make financial
decisions in no more than 700 words, based on your answers:
1. Stock Valuation: A stock has an initial price of $100 per share, paid a dividend of $2.00 per
share during the year, and had an ending share price of $125. Compute the percentage total
return, capital gains yield, and dividend yield.
2. Total Return: You bought a share of 4% preferred stock for $100 last year. The market price
for your stock is now $120. What was your total return for last year?
3. CAPM: A stock has a beta of 1.20, the expected market rate of return is 12%, and a risk-free
rate of 5 percent. What is the expected rate of return of the stock?
4. WACC: The Corporation has a targeted capital structure of 80% common stock and 20%
debt. The cost of equity is 12% and the cost of debt is 7%. The tax rate is 30%. What is the
company's weighted average cost of capital (WACC)?
5. Flotation Costs: Medina Corp. has a debt-equity ratio of .75. The company is considering a
new plant that will cost $125 million to build. When the company issues new equity, it incurs
a flotation cost of 10%. The flotation cost on new debt is 4%. What is the initial cost of the
plant if the company raises all equity externally?
decisions in no more than 700 words, based on your answers:
1. Stock Valuation: A stock has an initial price of $100 per share, paid a dividend of $2.00 per
share during the year, and had an ending share price of $125. Compute the percentage total
return, capital gains yield, and dividend yield.
2. Total Return: You bought a share of 4% preferred stock for $100 last year. The market price
for your stock is now $120. What was your total return for last year?
3. CAPM: A stock has a beta of 1.20, the expected market rate of return is 12%, and a risk-free
rate of 5 percent. What is the expected rate of return of the stock?
4. WACC: The Corporation has a targeted capital structure of 80% common stock and 20%
debt. The cost of equity is 12% and the cost of debt is 7%. The tax rate is 30%. What is the
company's weighted average cost of capital (WACC)?
5. Flotation Costs: Medina Corp. has a debt-equity ratio of .75. The company is considering a
new plant that will cost $125 million to build. When the company issues new equity, it incurs
a flotation cost of 10%. The flotation cost on new debt is 4%. What is the initial cost of the
plant if the company raises all equity externally?
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Rating:
/5
Solution: How companies make financial decisions