Fin 4100 Essay

Financial Management 1. Happy Valley, Inc. stock is valued at $51. 40 a share. The company pays a constant dividend of $3. 80. What is the required return on this stock? Po = D/Rs $51. 40 = $3. 80/Rs Rs = 7. 39% 2. The Francis Company is expected to pay a dividend of D1 = $1. 25 per share at the end of the year, and that dividend is expected to grow at a constant rate of 6. 00% per year in the future. The company’s beta is 1. 15, the market risk premium is 5. 50%, and the risk-free rate is 4. 00%. What is the company’s current stock price? Po = D1/(Rs-g)Rs = 4% + (5. 5%)1. 15 = 10. 325% Po = 1. 25/(. 10325-. 06) Po = 28. 90 3. Nachman Industries just paid a dividend of $1. 32. Analysts expect the company’s dividend to grow by 30% this year, by 10% in Year 2, and at a constant rate of 5% in Year 3 and thereafter. The required return on this low-risk stock is 9. 00%. What is the stock’s current market value? D1 = 1. 716 D2 = 1. 8876 D3 = 1. 98198 P2 = 1. 98198/(. 09-. 05) = 49. 5495 Po = 1. 716/(1. 09) + (1. 8876+49. 5495)/(1. 09)^2 Po = 44. 87 4. A firm has the following sales: 008200920102011 $1,248,311$1,542,661$1,821,962$2,048,725 Use the compound average growth rate to forecast 2012 sales. g = [(2048725/1248311)^ . 3333] -1 g = 17. 956069% 2012 sales = 2048725 (1+. 17956069) 2012 sales = 2416595. 469 5. A firm is considering two projects, and it requires a 12% return on its projects. Their minimum payback period is 2. 5 years. Assuming the projects are independent (not mutually exclusive), which would you choose based on the payback method? The NPV? The IRR? Project AProject B Initial outlay $200,000Initial outlay $180,000 Cash flows Year 1$70,000Year 1$80,000 Year 2$80,000Year 2$90,000 Year 3$90,000Year 3$30,000 Year 4$90,000Year 4$40,000 Year 5$100,000Year 5$40,000 Payback for A: 2. 55 years (reject) NPV for A: $104,275. 05 (accept) IRR for A: 30. 15% (accept) Payback for B: 2. 33 years (accept) NPV for B: $32,647. 23 (accept) IRR for B: 20. 57% (accept) If the projects were mutually exclusive, then based off of Payback, only B is accepted; off of NPV, A is accepted; and off of IRR, A is accepted. 6. A firm has a capital structure containing 40% debt, 20% preferred tock, and 40% common stock equity. The firm’s debt has a yield to maturity of 8. 1%, its annual preferred stock dividend is $3. 10, and the preferred stock’s current market price is $50 per share. The firm’s common stock has a beta of 0. 9, and the risk free rate and the market return are currently 4% and 13. 5% respectively. The firm is subject to a 40% tax rate. What is the firm’s WACC? WACC = . 40 (8. 1%) (1- . 40) + . 20 (6. 2%) + . 40 (12. 55%) = 8. 204% 7. A firm has 1 million shares of outstanding common stock which currently trades at $50 per share. The firm’s stockholders require a 15% return on their investment. The firm also has $47. 1 million (par value) in 5 year, fixed rate notes with an after tax yield to maturity of 7% . The current market value of the five year notes is $49 million. The firm also has 200,000 outstanding shares of preferred stock which pay an annual dividend of $8 and currently trade at their $80 per share par value. What is the firm’s WACC? Market cap for common stock: $50M Market cap for debt: $49M Market cap for preferred stock: $16M WACC = . 15 (. 43478) + . 07 (. 42609) + . 10 (. 13913) = 10. 90%