Boom and Bust Company is financed entirely by common stock that is priced to offer a 20% expected return. If the company repurchases 50% of the stock and substitutes an equal value of debt yielding 8%, what is the expected return on its common stock after refinancing?
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- Assume that IWT has completed its IPO and has a $112.5 million capital budget planned for the coming year. You have determined that its present capital structure (80% equity and 20% debt) is optimal, and its net income is forecasted at $140 million. Use the residual distribution approach to determine IWT’s total dollar distribution. Assume for now that the distribution is in the form of a dividend. Suppose IWT has 100 million shares of stock outstanding. What is the forecasted dividend payout ratio? What is the forecasted dividend per share? What would happen to the payout ratio and DPS if net income were forecasted to decrease to $90 million? To increase to $160 million? In general terms, how would a change in investment opportunities affect the payout ratio under the residual distribution policy? What are the advantages and disadvantages of the residual policy? (Hint: Don’t neglect signaling and clientele effects.)Mackenzie Company has a price of $34 and will issue a dividend of $2.00 next year. It has a beta of 1.5, the risk-free rate is 5.2%, and the market risk premium is estimated to be 5.2%. a. Estimate the equity cost of capital for Mackenzie. b. Under the CDGM, at what rate do you need to expect Mackenzie's dividends to grow to get the same equity cost of capital as in part (a)?Mackenzie Company has a price of $37 and will issue a dividend of $2.00 next year. It has a beta of 1.2, the risk-free rate is 5.4%, and the market risk premium is estimated to be 4.8%. a. Estimate the equity cost of capital for Mackenzie. b. Under the CDGM, at what rate do you need to expect Mackenzie's dividends to grow to get the same equity cost of capital as in part (a)? a. Estimate the equity cost of capital for Mackenzie. The equity cost of capital for Mackenzie is %. (Round to two decimal places.) b. Under the CGDM, at what rate do you need to expect Mackenzie's dividends to grow to get the same equity cost of capital as in part (a)? The expected growth rate for dividends is | %. (Round to two decimal places.)
- Maynard Steel plans to pay a dividend of $3.00 this year. The company has an expected earnings growth rate of 4.0% per year and an equity cost of capital of 10.0%. a. Assuming that Maynard's dividend payout rate and expected growth rate remain constant, and that the firm does not issue or repurchase shares, estimate Maynard's share price. b. Suppose Maynard decides to pay a dividend of $1.00 this year and use the remaining $2.00 per share to repurchase shares. If Maynard's total payout rate remains constant, estimate Maynard's share price.An unlevered firm has expected earnings of $2,401 and a market value of equity of $19,600. The firm is planning to issue $4,000 of debt at 6 percent interest and use the proceeds to repurchase shares at their current market value. Ignore taxes. What will be the cost of equity after the repurchase?Barton Industries estimates its cost of common equity by using three approaches: the CAPM, the band - yield - plus - nisk - premium approach, and the DCF model. Burton expects next year's annual dividend, D₁, to be $1.70 and it expects dividends to grow at a constant rate g = 5,4% The firm's current common stock price, Po, is $20.00. The current risk-free rate, FRF, = 4.9% the market risk premium, RPM = 6.3%, and the firm's stuck has a current beta, b, = 1.40. Assume that the firm's cast of debt, rd is 10.78%. The firm uses a 3.3% risk premium when arriving at a ballpark estimate of its cost of equity using the bund-vield-risk-premium approach. What is the firm's cost of equity using each of these three approaches? CAPM cost of equity. Band yield plus visle premium: DCF cost of equity: % 1. %
- An all-equity firm has expected earnings of $14,200 and a market value of $82,271. The firm is planning to issue $15,000 of debt at 6.3 percent interest and use the proceeds to repurchase shares at their current market value. Ignore taxes. What will be the cost of equity after the repurchase?Mackenzie Company has a price of $32 and will issue a dividend of $2.00 next year. It has a beta of 1.1, the risk-free rate is 5.9%, and the market risk premium is estimated to be 4.8%. a. Estimate the equity cost of capital for Mackenzie. b. Under the CDGM, at what rate do you need to expect Mackenzie's dividends to grow to get the same equity cost of capital as in part (a)? a. Estimate the equity cost of capital for Mackenzie. The equity cost of capital for Mackenzie is %. (Round to two decimal places.)How I RESOLVE THIS PROBLEM Sun instrument expects to issue new stock at $34 a share with estimated flotation costs of 7 percent of the market price. The comapny currently pays a $ 2.10 cash dividend and has a 6 percent growth rate. What are the costs of retained earnings and new common stock?
- The current stock price of Sheridan Inc., is $42.60. If the required rate of return is 30%, what is the dividend paid by this firm if the Dividend is not expected to grow in the future? Dividend paid?Suppose instead that the company is about to pay a dividend of $2.00 per share. You also learn that the company is expected to have net income of $100 million, dividends of $50 million, and total equity of $1.5 billion (and that these relationships are expected to be stable). If the relevant required rate of return is 10%, what is the intrinsic value per share of the company’s stock?Barton Industries estimates its cost of common equity by using three approaches: the CAPM, the bond-yield-plus-risk-premium approach, and the DCF model. Barton expects next year's annual dividend, D1, to be $2.40 and it expects dividends to grow at a constant rate gL = 5.8%. The firm's current common stock price, P0, is $21.00. The current risk-free rate, rRF, = 4.8%; the market risk premium, RPM, = 6.1%, and the firm's stock has a current beta, b, = 1.2. Assume that the firm's cost of debt, rd, is 10.57%. The firm uses a 4.1% risk premium when arriving at a ballpark estimate of its cost of equity using the bond-yield-plus-risk-premium approach. What is the firm's cost of equity using each of these three approaches? Do not round intermediate calculations. Round your answers to two decimal places. CAPM cost of equity: % Bond-Yield-Plus-Risk-Premium: % DCF cost of equity: % If you are equally confident of all three methods, then what is the best estimate of the firm’s cost of…
