Question

In: Finance

1- Expected cash dividends are $4.00, the dividend yield is 6%, flotation costs are 7% of...

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.

Solutions

Expert Solution

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 2nd BGN 2nd 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.

In case of any query, kindly comment on the solution


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