Question

In: Finance

Sales $1,000 Net Income $50 Total Assets $2,000 Shareholder equity $750 Tax rate 40.0% Bond Issue:...

Sales $1,000
Net Income $50
Total Assets $2,000
Shareholder equity $750
Tax rate 40.0%

Bond Issue: 1.5 million bonds that are $1,000 par value 20-year 5.0% coupon bonds with semiannual
payments with a yield to maturity of 7.0%.

100.0 million shares of stock outstanding
Market price per share $20.00
2.0 million shares of $8.00 per share dividend preferred stock
Market price per share of preferred stock $225.00
Percentage flotation costs per share for preferred stock 8.0%
Company's stock beta 1.25
Risk free rate 3.0%
Expected return on the market 9.5%
Market risk premium 6.5%
Expected dividend next year on common stock $2.00 per share
Expected growth rate in common stock dividends 6.0%

1. Calculate the percentage of common stock in the company's market value capital structure

a. 44.08%

b. 45.73%

c. 49.59%

d. 55.10%

e. 62.26%

2. Calculate the CAPM required return on the company's common stock

a. 9.68%

b. 10.01%

c. 11.13%

d. 12.24%

e. 13.35%

3. Calculate the DCF (dividend growth model) required return on the company's common stock

a. 6.67%

b. 10.60%

c. 14.40%

d. 16.00%

e. 16.16%

4. Calculate the required return on the company's preferred stock.

a. 3.86%

b. 4.06%

c. 4.25%

d. 4.44%

e. 4.64%

Expert Solution

1. Price of the bond has to be found using PV function in EXCEL

=PV(rate,nper,pmt,fv,type)

Please remeber that the payments are semi-annual

rate=7%/2=3.5%

nper=20 years*2=40

pmt=semi-annual coupon=(coupon rate*face value)/2=(5%*1000)/2=50/2=25

fv=1000

=PV(3.5%,40,25,1000,0)=$786.45

Market value of debt=nummber of bonds*price of bond=1.5*786.45=1179.67 million

Market value of common stock=number of shares*price per share=100*20=2000 million

Market value of preferred stock=number of preferred stock*share price=2*225=450 million

Total value=1179.67+2000+450=3629.67

Common stock share=2000/3629.67=55.10%

Option d is correct

2. required return on common stock using CAPM=risk free rate+(beta*market risk premium)=3%+(1.25*6.5%)=11.13%

option c is correct

3. required rate of return on DCF=(D1/Sahre price)+growth rate=(2/20)+6%=10%+6%=16%

Option d is correct

4. required return on preferred stock=annual dividend/(Preferred stock price-flotation cost)=8/(225-(8%*225))=8/207=3.86%

Option a is correct

jeff jeffy answered 1 year ago

15) ABC Inc. has a net income of $1,000. The tax rate is 21% and the...

15) ABC Inc. has a net income of $1,000. The tax rate is 21% and the firm made an interest payment of $250 during the year. The depreciation for the year was $200. During the year, the net fixed assets increased by $500. Cash increased by $50, inventories decreased by $75, receivables increased by $100, payables declined by $125, and the short term debt for the company increased by 150. The firm saw its common stock and paid in surplus...

1) A company had net income of $2,740,000, net sales of $26,500,000, and average total assets...

1) A company had net income of $2,740,000, net sales of $26,500,000, and average total assets of $11,800,000. Its return on total assets equals: Multiple Choice 23.22%. 44.53%. 10.34%. 4.31%. 430.66%. 2) Using the information below, calculate cost of goods sold for the period: Sales revenues for the period $ 1,316,000 Operating expenses for the period 251,000 Finished Goods Inventory, January 1 48,000 Finished Goods Inventory, December 31 53,000 Cost of goods manufactured for the period 552,000 Multiple Choice $798,000....

1. A company had net income of $48,000, net sales of $380,000, and average total assets...

1. A company had net income of $48,000, net sales of $380,000, and average total assets of $280,000. Its profit margin and total asset turnover were respectively: Multiple Choice 1.36%; 0.17. 1.97%; 1.36. 12.63%; 1.36. 1.36%; 12.63. 12.63%; 0.17. 2. Six months ago, a company purchased an investment in stock for $69,000. The investment is classified as available-for-sale securities. This is the company’s first and only investment in available-for-sale securities. The current fair value of the stock is $72,600. The...

A company with net income of $30 million and shareholder equity of $200 million and a...

A company with net income of $30 million and shareholder equity of $200 million and a 40% payout ratio would expect a sustainable constant-growth rate of: A) 4%. B) 9%. C) 21%. D) 25%.

A bond had an issue price of $1,000, a redemption price of $1,000, a coupon rate...

A bond had an issue price of $1,000, a redemption price of $1,000, a coupon rate of 8%, and pays semiannual interest on Feb 1 and Aug 1. On Oct 1, 2017, an investor buys the bond for $1,040. The investor sells the bond on May 1, 2019 for $1,050. a. What is the investor’s basis in the bond? b. If the investor is a cash basis taxpayer how much interest income must the investor include in income in 2017,...

Neiman Corp. has Net Income of $31,722 and Total Equity of $118,857. Also, its Sales are...

Neiman Corp. has Net Income of $31,722 and Total Equity of $118,857. Also, its Sales are $285,760, Total Assets are $245,626 and Total Liabilities are $126,769, but only $41,769 are from Current Liabilities. Porter’s Debt/Equity ratio is accordingly 1.067. Neiman's Total Asset Turnover ratio suggests that $1.163 dollars in sales is generated for each $1 of assets. Also, the Profit Margin shows that the firm has a Net Income of $0.111 for every $1 in sales. Industry average ratios: ROE...

Given the following information, calculate the ROE. Sales = $350,000; Net Income = $50,000; Total assets...

Given the following information, calculate the ROE. Sales = $350,000; Net Income = $50,000; Total assets = $500,000; D/E = 1.5. a. 30% b. 20% c. 15% d. 25% e. 10%

A company has $20 billion of sales and $1 billion of net income. Its total assets...

A company has $20 billion of sales and $1 billion of net income. Its total assets are $10 billion. The company’s total assets equal total invested capital, and its capital consists of half debt and half common equity. The firm’s interest rate is 5%, and its tax rate is 25%. What is its profit margin? What is its ROA? What is its ROE? What is its ROIC? Would this firm’s ROA increase if it used less leverage? (The size of...

What could be some reasons why a banks total assets, liabilities and shareholder equity change?

Company had $25,000,000 in sales last year. The company's net income was $875,000. Its total assets...

Company had $25,000,000 in sales last year. The company's net income was $875,000. Its total assets equal $8,000,000. The company's ROE was 16%. The company is financed entirely with debt and common equity. What is the company's debt ratio? A. 31.6% B. 3.5% C. 10.9% D. 14.6% E. 64.4%