Question

1-

Expected cash dividends are $4.00, the dividend yield is 6%, flotation costs are 7% of price, and the growth rate is 3%. Compute the approximate cost of new common stock. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

• 9.20%

• 10.45%

• 9.45%

• 11.55%

2-

Pedro Gonzalez will invest $22,000 at the beginning of each year for the next 8 years. The interest rate is 11 percent. What is the future value? Use Appendix C to calculate the answer.

• $260,898.

• $289,608.

• $311,608.

• $280,644.

Answer 1

1.Information provided:

Expected cash dividend= $4

Dividend yield= 6%

Flotation cost= 7%

Growth rate= 3%

The question is solved by first computing the current price of the stock.

Dividend yield is calculated using the below formula:

Dividend Yield= Annual dividend/Current stock price

0.06= $4/ Current stock price

Current stock price= $4/ 0.06

                                     = $66.67.

Cost of new equity= Next year’s dividend/ Share price (1-Flotatin cost)+ growth rate

                                    = $4/ $66.67*(1 - 0.07) + 0.03

                                    = $4/ $62 + 0.03

                                    = 0.0645 + 0.03

                                    = 0.0945*100

                                    = 9.45%

Hence, the answer is option c.

2. Information provided:

Yearly investment= $22,000

Time= 8 years

Interest rate= 11%

The question is concerning finding the future value of an annuity due. Annuity due refers to annuity that occurs at the beginning of a period.

This can be solved using a financial calculator by inputting the below into the calculator:

The financial calculator is set in the end mode. Annuity due is calculated by setting the calculator to the beginning mode (BGN). To do this, press 2^nd BGN 2^nd SET on the Texas BA II Plus calculator.

Enter the below in a financial calculator in BGN mode:

PMT= -22,000

N= 8

I/Y= 11

Press the CPT key and FV to compute the future value.

The value obtained is 289,607.38.

Therefore, the future value is $289,607.38.

Hence, the answer is option b.

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