General Account Questions Questions Of General AccountMicrosoft Corp. will pay a dividend of $2.04 per share next year.Investors anticipate that the annual dividends will grow by 2% per yearforever, and they require a 12% discount rate.Calculate the value of the stock.

To calculate the value of the stock, we can use the Gordon Growth Model (Dividend Discount Model),…

Answered: Questions Of General Account Microsoft…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter7: Common Stock: Characteristics, Valuation, And Issuance

Section: Chapter Questions

Problem 12P

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CALCULATING THE WACC Here is the condensed 2019 balance sheet for Skye Computer Company (in thousands of dollars): Skyes earnings per share last year were 3.20. The common stock sells for 55.00. last years dividend (D0) was 2.10, and a flotation cost of 10% would be required to sell new common stock. Security analysts are projecting that the common dividend will grow at an annual rate of 9%. Skyes preferred stock pays a dividend of 3.30 per share, and its preferred stock sells for 30.00 per share. The firms before-lax cost of debt is 10%, and its marginal tax rate is 25%. The firms currently outstanding 10% annual coupon rate, long-term debt sells at par value. The market risk premium is 5%, the risk-free rate is 6%, and Skyes beta is 1.516. The firms total debt, which is the sum of the companys short-term debt and long-term debt, equals 1.2 million. a. Calculate the cost of each capital component, that is, the after-tax cost of debt, the cost of preferred stock, the cost of equity from retained earnings, and the cost of newly issued common stock. Use the DCF method to find the cost of common equity. b. Now calculate the cost of common equity from retained earnings, using the CAPM method. c. What is the cost of new common stock based on the CAPM? (Hint: Find the difference between r1 and rs as determined by the DCF method, and add that differential to the CAPM value for rs.) d. If Skye continues to use the same market-value capital structure, what is the firms WACC assuming that (1) it uses only retained earnings for equity and (2) if it expands so rapidly that it must issue new common stock?
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Questions Of General Account Microsoft Corp. will pay a dividend of $2.04 per share next year. Investors anticipate that the annual dividends will grow by 2% per year forever, and they require a 12% discount rate. Calculate the value of the stock.
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Questions Of General Account Microsoft Corp. will pay a dividend of $2.04 per share next year. Investors anticipate that the annual dividends will grow by 2% per year forever, and they require a 12% discount rate. Calculate the value of the stock.