How companies make financial decisions

Reference no: EM131457300

Rate of Return for Stocks and Bonds

Purpose of Assignment

The purpose of this assignment is to allow the student an opportunity to calculate the rate of return of equity and debt instruments. It allows the student to understand the effects of dividends; capital gains; inflation rates; and how the nominal rate of return affects valuation and pricing. The assignment also allows the student to apply concepts related to CAPM, WACC, and Flotation Costs to understand the influence of debt and equity on the company's capital structure.

Calculate the following problems and provide an overall summary of how companies make financial decisions in no more than 700 words, based on your answers:

1. Stock Valuation: A stock has an initial price of $100 per share, paid a dividend of $2.00 per share during the year, and had an ending share price of $125. Compute the percentage total return, capital gains yield, and dividend yield.

2. Total Return: You bought a share of 4% preferred stock for $100 last year. The market price for your stock is now $120. What was your total return for last year?

3. CAPM: A stock has a beta of 1.20, the expected market rate of return is 12%, and a risk-free rate of 5 percent. What is the expected rate of return of the stock?

4. WACC: The Corporation has a targeted capital structure of 80% common stock and 20% debt. The cost of equity is 12% and the cost of debt is 7%. The tax rate is 30%. What is the company's weighted average cost of capital (WACC)?

5. Flotation Costs: Medina Corp. has a debt-equity ratio of .75. The company is considering a new plant that will cost $125 million to build. When the company issues new equity, it incurs a flotation cost of 10%. The flotation cost on new debt is 4%. What is the initial cost of the plant if the company raises all equity externally?

Submit your summary and all calculations.

Reference no: EM131457300

Questions Cloud

Check the given statement is correct or not : Consider the illustration where you are choosing between two investments, fully taxable bonds yielding 10% pretax per year and tax-exempt bonds.

Difference between taxable and tax-exempt bonds : Consider the illustration in Section 7.3 where an investment choice was being made between taxable and tax-exempt bonds in the presence of tax-rate uncertainty.

Determine what other factors you would need to know : Evaluate the information provided above, and determine what other factors you would need to know before booking your company's retreat at this venue.

Should the firm undertake clientele-based arbitrage : Suppose a firm has a tax loss in the current period of $10 million, which when added to prior tax losses gives it an NOL carryforward of $15 million.

How companies make financial decisions : Calculate the following problems and provide an overall summary of how companies make financial decisions in no more than 700 words, based on your answers.

Demand curve for labor downward-sloping : Why is the demand curve for labor downward-sloping? What causes the labor demand curve for a firm to shift?

Evaluate the cash in taxable bonds : Your colleague picks up the 2012 annual report of Microsoft (that we showed in Chapter 6) and finds that Microsoft reports an effective tax rate of 23.8%.

What is wrong with argument : The reasoning is that more highly paid U.S. workers cannot compete, and U.S. jobs are lost. What is wrong with this argument?

Explain the term compound financial instrument : ACC301 Advanced Financial Accounting Assignment. Explain the term "compound financial instrument" and its treatment

User Account

All Pages