Complete the following graded homework assignment in a Word document named FIN515_Homework4_yourname. Show the details of your calculation and work in your answer to the problems.
· Problems (pp. 303-305)
o 9-1 Future Value of a Company
o 9-4 Dividend Yield and Cost of Equity Capital
o 9-5 No Growth Company
o 9-6 Value of Operations of Constant Growth
o 9-7 Expected Growth Rate of Constant Growth Company
o 9-12 Non Constant Dividend
o 9-19 Enterprise Value
· Problems (pp. 427–429)
o 12-1 Equity Cost of Capital
o 12-3 Higher Equity Cost of Capital
o 12-26 Equity Cost of Capital, Debt Cost of Capital and WACC
Course Text:
Corporate Finance
3rd Edition
by Jonathan Berk & Peter DeMarzo
© 2014 Pearson Education
Problems pp. 303 – 305
Question 1. Assume Evco, Inc., has a current price of $50 and will pay a $2 dividend in one year, and its equity cost of capital is 15%. What price must you expect it to sell for right after paying the dividend in one year in order to justify its current price?
Question 4. Krell Industries has a share price of $22 today. 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?
Question 5. 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?
Question 6. 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%?
303
304
Question 7. Dorpac Corporation has a dividend yield of 1.5%. Dorpac’s equity cost of capital is 8%, and its dividends are expected to grow at a constant rate.
a. What is the expected growth rate of Dorpac’s dividends?
b. What is the expected growth rate of Dorpac’s share price?
Question 12. Procter & Gamble will pay an annual dividend of $0.65 one year from now. Analysts expect this dividend to grow at 12% per year thereafter until the fifth year. After then, growth will level off at 2% per year. According to the dividend-discount model, what is the value of a share of Procter & Gamble stock if the firm’s equity cost of capital is 8%?
Question 19. Heavy Metal Corporation is expected to generate the following free cash flows over the next five years:
Year |
1 |
2 |
3 |
4 |
5 |
FCF ($ millions) |
53 |
68 |
78 |
75 |
82 |
After then, the free cash flows are expected to grow at the industry average of 4% per year. Using the discounted free cash flow model and a weighted average cost of capital of 14%:
Problems pp. 427 – 429
Question 1. Suppose Pepsico’s stock has a beta of 0.57. If the risk-free rate is 3% and the expected return of the market portfolio is 8%, what is Pepsico’s equity cost of capital?
Question 3. Aluminum maker Alcoa has a beta of about 2.0, whereas Hormel Foods has a beta of 0.45. If the expected excess return of the marker portfolio is 5%, which of these firms has a higher equity cost of capital, and how much higher is it?
Question 26. Unida Systems has 40 million shares outstanding trading for $10 per share. In addition, Unida has $100 million in outstanding debt. Suppose Unida’s equity cost of capital is 15%, its debt cost of capital is 8%, and the corporate tax rate is 40%.
a. What is Unida’s unlevered cost of capital?
b. What is Unida’s after-tax debt cost of capital?
c. What is Unida’s weighted average cost of capital?