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Corp Finance Ch 11 Questions And Correct Answers
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Corp Finance Ch 11 Questions And Correct Answers(11-10)
The earnings, dividends and stock price of Shelby Inc. are expected to grow at 7% per
year in the future. Shelby's common stock sells for $23 per share, its last dividend was
$2.00 and the company will pay a dividend of $2.14 at the end of the current year.
a) Using the discounted cash flow approach what is the cost of equity? - Answer Stock
price = D1÷(r-g)
D1 is next expected dividend
r is required return
g is growth rate
a)
$23 = $2.14÷(r-7%)
Cost of equity, r = 16.3%
(11-10)
The earnings, dividends and stock price of Shelby Inc. is expected to grow at 7% per
year in the future. Shelby's common stock sells for $23 per share, its last dividend was
$2.00 and the company will pay a dividend of $2.14 at the end of the current year.
b) If the firms beta is 1.6, the risk free rate is 9% and the expected return on the market
is 13%, then what would be the firm's cost of equity based on the CAPM approach? -
Solution Expected return = Rf+β×Rp
Rf is risk free return
Rp is risk premium
= 9%+1.6×(13%-9%)
= 15.4%
(11-10)
, Assume that Shelby Inc.'s future earnings, dividends and stock price are expected to
grow at a constant rate of 7% per year. The common stock of Shelby sells for $23.00 per
share. The last dividend paid by the firm was $2.00 and the company will pay a dividend
of $2.14 at the end of the current year.
(c) If the firm's bonds earn a return of 12% then what would be your estimate of Rs using
the own bond yield plus judgement risk premium approach? - Solution Cost of equity:
= Bond yield+Market risk premium
= 12%+(13%-9%)
=16%
(11-10)
Earnings, dividends and the stock price of Shelby Inc. are expected to grow at a
constant rate of 7% per year in the future. The common stock of Shelby sells for $23 per
share, the last dividend was $2.00 and Shelby will pay a dividend of $2.14 at the end of
the current year.
(d) Based on your results from parts a through c what is your estimate of Shelby's cost
of equity?
- Answer Estimate of the shelby's cost of equity:
= 16.3%+15.4%+16%÷3
= 15.9%
(11- 11)
Radon Homes current EPS is $6.50. It was $4.42 five years ago. The company pays out
40% of its earnings as dividends and the stock sells for $36.
(a) Determine the historical growth rate in earnings (hint this is a 5-year growth period.)
- Answer N= 5
PV= -4.42
PMT=0
FV=6.5
Calc. I
=8%
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