Fin FIn

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University of Notre Dame *

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102

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Finance

Date

Jan 9, 2024

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1. The South Co. has 17,501,023 Shares outstanding. It just paid a dividend of $3.29. It plans to grow its dividends 3.1% annually forever. The required rate of return is 14%. Using the dividend growth model , what is the total equity value of South? (Round to a whole number) 2. East bank has an issue of preferred stock with a stated dividend of $3.75 that just sold for $87 per share. What is the bank's cost of preferred stocks? (write in percent form 00.00) 3. A company just paid a dividend of $3.03, they anticipate growing the dividend at 7% forever. What will the dividend be in year 10 ? 4. Suppose a firm just paid $300 million dollars in total dividends. You expect future dividends to grow at a constant rate of 5% per year, forever. If the required return by shareholders is 15.5%, what is the price of the stock? (Assume that there are 115 million shares outstanding) A. $17.66 B. $49.78 C. $24.75 D. $28.95 E. $32.75 F. $52.20 G. $54.80 H. $26.09

5. The disadvantages of the Dividend Growth Model are: 1. Its Complicated 2. It does not explicitly consider risk 3. Sensitive to growth rates 4. Its difficult to use 5. Only applies to companies that pay dividends 6. Assumes dividends will grow at a constant rate. A. 1, 3, & 5 B. 1, 2, 3, 4 & 5 C. 2, 3, 5 & 6 D. 1, 2, 3 & 5 E. Not enough information. What the heck is the dividend growth model. F. 2, 4, & 6 G. All of the above 6. Using CAPM what is the expected return of a company who's Beta is .65? The risk free rate is 1.5, the market risk premium is 10% and return on the market is 11.5%? A. 8.527% B. 6.00% C. 7.025% D. 8.00% E. 8.975% 7. Suppose past returns have been 10%, 14%, 7%, 17%, -8%, 9% -5%, 11%, and -17%. What is the average return (in percent)? A. 4.58% B. 4.22% C. 5.40% D. 3.56% E. 4.00% 8. Suppose the average is 5.4% and past returns have been 10%, 14%, 7%, 17%, -8%, 9%

-5%, 11%, and -17%. What is the return of the tenth year (in percent) A. -18 B. 16 C. -19 D. 25 E. 15 F. 17 9.True of False? The Capital Asset Pricing Model does not adjust for risk? 10. ABC Co. has an opportunity to invest in an expansion of its foreign operations. ABC anticipates financing the investment using both debt and common equity. In particular, the company expects to issue 2 million shares of equity and 60,000 new 20-year bonds. The current share price is $33. Furthermore, the beta of the firm is 1.6 while the market risk premium is 11.5% and the expected return on the market is 14.8%. The face value of the bonds is $1,000 and the annual coupon rate is 5.5%. Their current long-term bonds are selling for $1,035. If the corporate tax rate is 30% what is the total value of the ABC Co? 11. ABC Co. has an opportunity to invest in an expansion of its foreign operations. ABC anticipates financing the investment using both debt and common equity. In particular, the company expects to issue an additional 2 million shares of new equity and 60,000 new 20-year bonds. The current share price is $33. Furthermore, the beta of the firm is 1.95 while the risk free rate is 3.8% and the expected return on the market is 14.8%. The face value of the bonds is $1,000 and the annual coupon rate is 8.5%. Their current long-term bonds are selling for $1,035. If the corporate tax rate is 28% what is the WACC of the ABC Co? A. 19.75% B. 14.98% C. 18.87% D. 15.85% E. 16.25%

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12. Some Co. has a current share price of $54 and a total of 14 million shares outstanding. The company currently has debt with a total face value of $995 million. These outstanding 20 year bonds are currently priced to yield 6.2% while quoting at 99.5% of total face value. The company will pay a dividend to common stock holders of $6.08 and anticipates growing the dividend at a constant rate of 4% per year indefinitely. If the corporate tax rate is 34%, what is the WACC of Some Company (in percent)? A. 8.93% B. 10.25% C. 14.78% D. 7.19% E. 16.25% 13. Another has a current share price of $44 and a total of 19 million shares outstanding. The company currently has debt with a present value of $885 million. These outstanding bonds are currently priced to yield 4.9% while quoting at 88.5% of total face value. The company recently paid a dividend to common stock holders of $4.08 and anticipates growing the dividend at a constant rate of 6% per year indefinitely. If the corporate tax rate is 30%, what is the weight(percent) of equity of Some Company? A. 50.38% B. 47.68% C. 46.78% D. 48.58% E. 51.42% F. 49.48% G. 45.88% 14. Another has a current share price of $44 and a total of 19 million shares outstanding.

The company debt has a present value of $885 million. These outstanding bonds are currently priced to yield 4.9% while quoting at 88.5% of total face value. The company recently paid a dividend to common stock holders of $4.08 and anticipates growing the dividend at a constant rate of 6% per year indefinitely. If the corporate tax rate is 30%, what is the weight(percent) of debt of Some Company? A. 50.70% B. 53.64% C. 52.53% D. 51.42% E. 49.69% F. 54.75% G. 48.58% 15. A company is expected to issue new bonds with a face value of $1,000. According to the indenture, the annual coupon rate is expected to be 8% and the bonds will mature in 18 years. Similar bonds are currently priced at 108% of par (or face value). Coupons will be paid annually, what is the before-tax cost of debt (in percent)? A. 8.00% B. 7.19% C. 7.48% D. 6.85% 16. A company is expected to issue new bonds with a face value of $1,000. The indenture specifies that the annual coupon rate is expected to be 5.5% and the bonds will mature in 15 years. Similar bonds are currently priced at 98.2% of par (or face value). If the company’s marginal tax rate is 24%, what is the after-tax cost of debt (in percent)? Assume coupons are paid annually. A. 4.32% B. 5.68% C. 5.25% D. 4.99% E. 4.15% F. 4.75% 17. Based on the capital asset pricing model, expected returns are based on which of the

following? I. market risk premium II. portfolio standard deviation III. beta IV. risk-free rate A. II and III B. I, II, III, and IV C. I and II D. none of the above E. I, III, and IV F. I and III 18. Suppose a company has EBIT of $61,221, depreciation of $10,189, cost of goods sold $32,459, paid $17,578 in taxes and $17,565 in interest. What is the company's net income? 19. Michael Company has a marketing opportunity that will cost $571,711, it will increase net income by $234,033 the first year, $221,569 the second year, $253,655 the third year and $152,349 the fourth year. Using the WACC as the discount rate what is the overall profit or loss of this marketing campaign in todays dollars? Michael has issued 20,076 $1000 face value bonds currently selling at 99% of par. They have 1,089,013 shares of common stock outstanding currently selling at $59 and no preferred stock. The after tax cost of debt is 3.78% and cost of equity is 11%. 20. True or False: Beta is a measurement of a company's individual risk?

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