Question

In: Finance

1) Bank of America has a preferred stock dividend of $3.76. The stock is trading for...

1) Bank of America has a preferred stock dividend of $3.76. The stock is trading for $62.66. What is the expected return of the preferred stock?

2) A company had free cash flows of $370 million last year. Free cash flows are expected to grow at 2.4% per year. The WACC for the firm is 7.1%. They currently have $7.9 billion in debt outstanding, and have 189 million common stock outstanding. The company does not have any preferred stock. What is the estimate of the stock price based on the firm valuation model?

3) A company had free cash flows of $522 million last year. Free cash flows are expected to grow at 3.8% per year. The WACC for the firm is 8.9%. They currently have $6.9 billion in debt outstanding, and have 211 million common stock outstanding. The company has 75 million preferred stock outstanding, that currently trade at $36. What is the estimate of the stock price based on the firm valuation model?

Expert Solution

Ans-1)

Preferred Stock Dividend = $3.76

Preferred Stock Price = $62.66

Expected Return of the Preferred Stock = Preferred Stock Dividend/Preferred Stock Price

=$3.76/$62.66

= 6%

Ans- 2)

FCF last year(FCF0) = $370 million

Growoth rate(g) = 2.4%

WACC = 7.1%

Calculating the Enterprise Value(EV) of firm:-

EV = $8061.28 millions

Enterprise Value = Value of equity + Value of Debt

$8061.28 millions = Value of equity + $7900 million

Value of equity = $161.28 millions

No of shares oustanding = 189 million

Firm's share price as per Enterprise Value = $161.28 millions/189 millions shares

= $0.8533 per share

So, the estimate of the stock price based on the firm valuation model is $0.8533 per share

Ans- 3)

FCF last year(FCF0) = $522million

Growoth rate(g) = 3.8%

WACC = 8.9%

Calculating the Enterprise Value(EV) of firm:-

EV = $10,624.24 millions

Value of Preferred Stock = No of Shares Outstanding*Share price

=75 million*$36

=$2700 million

Enterprise Value = Value of equity + Value of Debt + Value of Preferred Stock

$10,624.24 millions = Value of equity + $6900 million + $2700 million

Value of equity = $1024.24 millions

No of shares oustanding = 211 million

Firm's share price as per Enterprise Value = $1024.24 millions/211 millions shares

= $4.8542 per share

So, the estimate of the stock price based on the firm valuation model is $4.8542 per share

jeff jeffy answered 1 year ago

Holdup Bank has an issue of preferred stock with a stated dividend of $7 that just...

Holdup Bank has an issue of preferred stock with a stated dividend of $7 that just sold for $87 per share. What is the bank’s cost of preferred ?

Holdup Bank has an issue of preferred stock with a $8 stated dividend that just sold...

Holdup Bank has an issue of preferred stock with a $8 stated dividend that just sold for $89 per share. What is the bank's cost of preferred stock? Options: 8.00% 9.35% 9.44% 8.63% 8.99%

Taylor Systems has just issued preferred stock. The stock has a 9 % annual dividend and...

Taylor Systems has just issued preferred stock. The stock has a 9 % annual dividend and a $ 75 par value and was sold at $72.00 per share. In addition, flotation costs of $6.00 per share were paid. Calculate the cost of the preferred stock.

Suppose Bank of America Stock has a beta of 1.32, whereas Boeing Stock has a beta...

Suppose Bank of America Stock has a beta of 1.32, whereas Boeing Stock has a beta of 1.23. If the risk-free interest rate is 1.78% and the expected return of the market portfolio is 10%, according to the CAPM? A. What is the expected return of Bank of America Stock? (Please Show Calculations - No excel please) B. What is the expected return of Boeing Stock? (Please Show Calculations - No excel please) C. What is the beta of a...

The preferred stock of Dragons Inc. pays a $1 dividend. What is the value of the...

The preferred stock of Dragons Inc. pays a $1 dividend. What is the value of the stock if your required rate of return is 10 percent? Mosser Corporation, Inc. paid a $4 dividend last year. At a constant growth rate of 6 percent, what is the value of the common stock if the investors require a 10 percent rate of return? HomeNet Inc. paid a $3 last year and the stock is currently selling for $60. If investors require a...

COST OF PREFERRED STOCK 15. A preferred stock paying a 7.5% dividend on par value ($100...

COST OF PREFERRED STOCK 15. A preferred stock paying a 7.5% dividend on par value ($100 Par) can be sold to net $65 per share. Tax rate is 34%. What is the cost of preferred stock to the firm? 16. Compute the cost of internal equity (or retained earnings) when the current market price of the common stock is $32. The expected dividend this forthcoming year is $1.75 increasing thereafter at a 6.5% annual rate.

QUESTION 1 The first commercial bank in America was the Bank of North America, chartered by...

QUESTION 1 The first commercial bank in America was the Bank of North America, chartered by the American Continental Congress. True False 1 points QUESTION 2 Not only did the federal government keep its funds in the First BUS but it also had a 50% ownership stake in the bank. True False 1 points QUESTION 3 The First Bank of the United States lost the vote in Congress to get another charter by one vote in both the...

1. Calculate the value of a preferred stock with a fixed annual dividend of $2.45, assuming...

1. Calculate the value of a preferred stock with a fixed annual dividend of $2.45, assuming a discount rate of 9.5%. Solve the problem two different ways: first by using the algebraic formula for a constant dividend preferred stock, then by using the built-in Excel function PV.

A stock that does not pay dividend is trading at $100. The stock price will increase...

A stock that does not pay dividend is trading at $100. The stock price will increase by 10% or decrease by 10% in one year. After that, the stock price will increase or decrease by 20% in the second year. The risk-free interest rate is 5% per annum with continuous compounding. Value a two-year American put option with strike price of $102. Note that risk-neutral probabilities or replicating portfolios may differ across two periods. You must also check for early...

Problem 8 A share of preferred stock has a par value of $100, an annual dividend...

Problem 8 A share of preferred stock has a par value of $100, an annual dividend of 2% and a current market price of $65. Part 1 What is the rate of return on the preferred stock?