SCHOOL OF ECONOMICS AND POLITICAL SCIENCES DEPARTMENT OF

ECONOMICS

COURSE: MANAGERIAL ECONOMICS

3RD RESEARCH ASSIGNMENT

NAME: BRATU CARINA-MARIA

DEPARTMENT: BUSINESS ADMINISTRATION

1st Subject

Which of the following statements is CORRECT? Please explain.

Answer: c. The preemptive right is a provision in the corporate charter that gives common

stockholders the right to purchase (on a pro rata basis) new issues of the firm's common

stock.

Explanation: The preemptive right gives current stockholders the right to purchase, on a pro
rata basis, any new shares issued by the firm. This right helps protect current stockholders
against both dilution of control and dilution of value. The corporate valuation model cannot
be used unless a company pays dividends.

Statement a is false-a number of companies have different classes of stock with different
voting rights. Statement b is simply false. Statement c is true. Statements d and e are false,
because the constant growth model can be used anytime as long as the constant growth rate is
less than the required return(even if the growth rate is negative). Statement e is false⎯a
number of companies have differentclasses of stock with different voting rights.

2nd Subject
Goode Inc.'s stock has a required rate of return of 11,50%, and it sells for $29,00 per share.
Goode's dividend is expected to grow at a constant rate of 7,00%. What was the last dividend,
D0? Please explain.

Answer: $1,22

3rd Subject

Huang Company's last dividend was $1,25. The dividend growth rate is expected to be
constant at 27,5% for 3 years, after which dividends are expected to grow at a rate of 6%
forever. If the firm's required return (rs) is 11%, what is its current stock price? Do not round
intermediate calculations. Please explain.
Answer: $45,14

4th Subject

Bouchard and Company hired you as a consultant to help estimate its cost of capital. You
have obtained the following data: D0 = $0.85; P0 = $22.00; and g = 6.00% (constant). The
CEO thinks, however, that the stock price is temporarily depressed, and that it will soon rise
to $34.00. Based on the DCF approach, by how much would the cost of equity from retained
earnings change if the stock price changes as the CEO expects? Do not round your
intermediate calculations. Please explain.

Answer: -1,45%

5th Subject

Daves Inc. recently hired you as a consultant to estimate the company’s WACC. You have
obtained the following information. (1) The firm's noncallable bonds mature in 20 years, have
an 8.00% annual coupon, a par value of $1,000, and a market price of $1,225.00. (2) The
company’s tax rate is 40%. (3) The risk-free rate is 4.50%, the market risk premium is 5.50%,
and the stock’s beta is 1.20. (4) The target capital structure consists of 35% debt and the
balance is common equity. The firm uses the CAPM to estimate the cost of equity, and it
does not expect to issue any new common stock. What is its WACC? Do not round your
intermediate calculations. Please explain.

Answer: 8,586%

6th Subject:

You were hired as a consultant to Quigley Company, whose target capital structure is 35%
debt, 10% preferred, and 55% common equity. The interest rate on new debt is 6.50%, the
yield on the preferred is 6.00%, the cost of retained earnings is 14.75%, and the tax rate is
40%. The firm will not be issuing any new stock. What is Quigley's WACC? Round final
answer to two decimal places. Do not round your intermediate calculations. Please explain.
Answer: 10,078%

7th Subject

Assume that you are on the financial staff of Vanderheiden Inc., and you have collected the

following data: The yield on the company’s outstanding bonds is 7.75%, its tax rate is 40%,
the next expected dividend is $0.65 a share, the dividend is expected to grow at a constant
rate of 6.00% a year, the price of the stock is $17.00 per share, the flotation cost for selling
new shares is F = 10%, and the target capital structure is 45% debt and 55% common equity.
What is the firm's WACC, assuming it must issue new stock to finance its capital budget?
Please explain:

Answer: 7,7291%

8th Subject
Bolster Foods’ (BF) balance sheet shows a total of $25 million long-term debt with a coupon
rate of 8.50%. The yield to maturity on this debt is 8.00%, and the debt has a total current
market value of $27 million. The balance sheet also shows that the company has 10 million
shares of stock, and the stock has a book value per share of $5.00. The current stock price is
$20.00 per share, and stockholders' required rate of return, rs, is 12.00%. The company
recently decided that its target capital structure should have 35% debt, with the balance being
common equity. The tax rate is 40%. Calculate WACCs based on book, market, and target
capital structures, and then find the sum of these three WACCs. Do not round your
intermediate calculations. Please explain

Answer: 30,22%

9th Subject

Agarwal Technologies was founded 10 years ago. It has been profitable for the last 5 years,
but it has needed all of its earnings to support growth and thus has never paid a dividend.
Management has indicated that it plans to pay a $0.25 dividend 3 years from today, then to
increase it at a relatively rapid rate for 2 years, and then to increase it at a constant rate of
8.00% thereafter. Management's forecast of the future dividend stream, along with the
forecasted growth rates, is shown below. Assuming a required return of 11.00%, what is your
estimate of the stock's current value? Use the dividend values provided in the table below for
your calculations. Do not round your intermediate calculations. Please explain.

Answer: $15,622

10th Subject

Savickas Petroleum’s stock has a required return of 12.00%, and the stock sells for $36.00
per share. The firm just paid a dividend of $1.00, and the dividend is expected to grow by
30.00% per year for the next 4 years, so D4 = $1.00(1.30)4 = $2.8561. After t = 4, the
dividend is expected to grow at a constant rate of X% per year forever. What is the stock’s
expected constant growth rate after t = 4, i.e., what is X? Do not round your intermediate
calculations. Please explain
Answer: 5,6329%