Question

Please give me solution and pick from multiple choice

Using the following returns, calculate the average returns for Abundant and Slim.

	Returns (%)
Year	Abundant	Slim
2006	8	15
2007	5	-4
2008	-6	-9
2009	7	11
2010	12	6
2011	9	10

	a.	The average return for Share Abundant is 5.83% and 4.83% for Share Slim.
	b.	The average return for Share Abundant is 5.4% and 2.8% for Share Slim.
	c.	The average return for Share Abundant is 5.5% and 4.5% for Share Slim.
	d.	The average return for Share Abundant is 4.83% and 5.83% for Share Slim.

Summit Systems will pay a dividend of $1.50 next year. If you expect Summit’s dividend to grow by 6% per year, what is its price per share if the required return of equity is 11%?

	a.	The price per share is $25.
	b.	The price per share is $31.80.
	c.	The price per share is $13.63.
	d.	The price per share is $30.

Pfd Company has debt with a yield to maturity of 7%, a cost of equity of 13% and a cost of preference stock of 9%. The market values of its debt, preference stock and equity are $13 million, $3 million and $15 million, respectively, and its tax rate is 35%. What is this firm’s WACC?  

	a.	The WACC (adjusted for tax) is 9.07%.
	b.	The WACC (adjusted for tax) is 8.42%.
	c.	The WACC (adjusted for tax) is 10.10%.
	d.	The WACC (adjusted for tax) is 9.79%.

Answer 1

1.

Average return of Abundant = (8+5-6+7+12+9)/6 = 5.83%

Average return of Slim = (15-4-9+11+6+10)/6 = 4.83%

Hence, correct option is (a) The average return for Share Abundant is 5.83% and 4.83% for Share Slim

2.

Givem, Dividend next year = D1 = 1.50

Return in Equity = r = 11%

Growth rate = g = 6%

Gordon's Growth model --> P0 = D1/(r - g)

=> Price of stock now = P0 = 1.5/(0.11 - 0.06) = 30

Hence, correct option is (d)The price per share is $30.

3.

WACC = w_e*R_e + w_p*Rp + w_d*R_d*(1-T_c)

where,

w_e = weight firm’s equity = 15 / (13 + 3 + 15) = 0.4839
w_p = weight of preferred stock = 3 / (13 + 3 + 15) = 0.0968
w_d = weight the firm’s debt = 13 / (13 + 3 + 15) = 0.4194
R_e = cost of equity = 0.13
R_p = cost of preferred stock = 0.09
R_d = cost of debt = 0.07
T_c = corporate tax rate = 0.35

=> WACC = 0.4839*0.13 + 0.0968*0.09 + 0.4194*0.07*(1-0.35) = 0.0907 or 9.07%

Hence, correct option is (a) The WACC (adjusted for tax) is 9.07%.