7-2 Fixed Progress Valuation Boehm Integrated is anticipated to pay a $1. 50 per share dividend on the finish of this yr (i. e. , D1 = $1. 50). The dividend is anticipated to develop at a relentless price of seven% a yr. The required price of return on the inventory, rs, is 15%. What’s the worth per share of Boehm’s inventory? P = D1/(rs – g) Value = $1. 50 / (Zero. 15 – Zero. 07) = $18. 75 7-Four Preferred Stock Valuation Nick’s Enchiladas Integrated has most well-liked inventory excellent that pays a dividend of $5 on the finish of every yr. The popular sells for $50 a share.
What’s the inventory’s required price of return? Vps = Dps/Rps Vps = $5/$50 = 10% 7-5 Non-constant Progress Valuation An organization presently pays a dividend of $2 per share (D0 = $2). It’s estimated that the corporate’s dividend will develop at a price of 20% per yr for the subsequent 2 years, then at a relentless price of seven% thereafter. The corporate’s inventory has a beta of 1. 2, the risk- free price is 7. 5%, and the market threat premium is Four%. What’s your estimate of the inventory’s present worth? Stock Return| 16. 50%| =Zero. 075+1. 2*(Zero. 115-Zero. 04)| Discounted| | | D1| 2. Zero| =2*(1. 2)^1| 2. 06| =2. 40/(1+|Zero. 0165|)^1| D2| 2. 88| =2*(1. 2)^2| 2. 12| =2. 88/(1+|Zero. 0165|)^2| D3| Three. 08 | =2. 88*(1. 07) | | | | P2| 32. 44| =(Three. 08)/(Zero. 0165-Zero. 07)| 23. 90| =32. 44/(1+|Zero. 0165|)^2| Shares Present Value| | 28. 08| | | 9-2 After-Tax Cost of Debt LL Integrated’s presently excellent 11% coupon bonds have a yield to maturity of eight%. LL believes it might challenge new bonds at par that would supply an analogous yield to maturity. If its marginal tax price is 35%, what’s LL’s after-tax value of debt? d(1 – T) = Zero. 08(Zero. 65) = 5. 2%. 9-Four Cost of Preferred Stock with Flotation Prices Burnwood Tech plans to challenge some $60 par most well-liked inventory with a 6% dividend. An identical inventory is promoting in the marketplace for $70. Burnwood should pay flotation prices of 5% of the difficulty worth. What’s the price of the popular inventory? Ep = Dividend/ Market Value – Flotation Prices =($60*Zero. 06)/(($70-($70*Zero. 05))= 5. 41% 9-5 Cost of Fairness – DCF Summerdahl Resort’s widespread inventory is presently buying and selling at $36 a share. The inventory is anticipated to pay a dividend of $Three. Zero a share on the finish of the yr (D1 = $Three. 00), and the dividend is anticipated to develop at a relentless price of 5% a yr. What’s its value of widespread fairness? P0 = $36; D1 = $Three. 00; g = 5%; rs= ? rs = D1/P0+ g = ($Three. 00/$36. 00) + Zero. 05 = 13. 33% 9-6 Cost of Fairness – CAPM Booher Guide Shops has a beta of Zero. eight. The yield on a Three-month T-bill is Four% and the yield on a 10-year T-bond is 6%. The market threat premium is 5. 5%, and the return on a median inventory out there final yr was 15%. What’s the estimated value of widespread fairness utilizing the CAPM? s = rRF + bi(RPM) = Zero. 06 + Zero. eight(Zero. 055) = 10. Four% 9-7 WACC Shi Importer’s steadiness sheet reveals $300 million in debt, $50 million in most well-liked inventory, and $250 million in whole widespread fairness. Shi’s tax price is 40%, rd = 6%, rps = 5. eight%, and rs = 12%. If Shi has a goal capital construction of 30% debt, 5% most well-liked inventory, and 65% widespread inventory, what’s its WACC? rd = 6%; T = 40%; rps = 5. eight%; rs = 12%. WACC = (wd)(rd)(1 – T) + (wps)(rps) + (wce)(rs) WACC = Zero. 30(Zero. 06)(1-Zero. 40) + Zero. 05(Zero. 058) + Zero. 65(Zero. 12) = 9. 17%
