What is the required rate of return on stock

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Reference no: EM131853704

1. Given the following information for Lawrence Manufacturing, find the WACC. Assume the company s tax rate is 35 percent. Debt: 21,000 bonds outstanding, 5.0 percent coupon, $1,000 par value, 15 years to maturity, selling for 97 percent of par; the bonds make semiannual coupon payments. Common stock: 500,000 shares outstanding, selling for $37 per share; the beta is 1.60. Market: 6 percent market risk premium and 3.0 percent risk-free rate.

7.80%

8.10%

7.45%

8.38%

7.30%

2. Lexington Company earned $105 million for the fiscal year ending yesterday. The firm also paid out 40 percent of its earnings as dividends yesterday. The firm will continue to pay out 40 percent of its earnings as annual, end-of-year dividends. The remaining 60 percent of earnings is retained by the company for use in projects. The company has 10 million shares of common stock outstanding. The current stock price is $45. The historical return on equity (ROE) of 15 percent is expected to continue in the future. What is the required rate of return on the stock? (Hint: use the retention ratio and ROE to estimate the growth rate)

17.85%

18.02%

19.64%

18.85%

19.17%

Reference no: EM131853704

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