Group assignment

1. A company’s preferred stock currently trades at $80 per share and pays a $6 annual dividend
per share. Ignoring flotation costs, what is the firm’s cost of preferred stock?
2. A firm’s common stock has expected dividend of $1.50, market price of $30.00, growth rate
of constant 5%, and flotation cost of 4%. If the firm must issue new stock, what is its cost of
new external equity?
3. The Heuser Company’s currently outstanding bonds have a 10% coupon and a 12% yield to
maturity. Heuser believes it could issue new bonds at par that would provide a similar yield
to maturity. If its marginal tax rate is 35%, what is Heuser’s after-tax cost of debt?
4. Tunney Industries can issue perpetual preferred stock at a price of $47.50 a share. The stock
would pay a constant annual dividend of $3.80 a share. What is the company’s cost of
preferred stock?
5. Percy Motors has a target capital structure of 40% debt and 60% common equity, with no
preferred stock. The yield to maturity on the company’s outstanding bonds is 9%, and its tax
rate is 40%. Percy’s CFO estimates that the company’s WACC is 9.96%. What is Percy’s
cost of common equity?
6. Trivoli Industries plans to issue perpetual preferred stock with an $11.00 dividend. The stock
is currently selling for $97.00; but flotation costs will be 5% of the market price, so the net
price will be $92.15 per share. What is the cost of the preferred stock, including flotation?
7. It is now January 1, 2009. Today you will deposit $1,000 into a savings account that pays
8%.
a. If the bank compounds interest annually, how much will you have in your account on
January 1, 2012?
b. What will your January 1, 2012, balance be if the bank uses quarterly compounding?
c. Suppose you deposit $1,000 in three payments of $333.333 each on January 1 of 2010,
2011, and 2012. How much will you have in your account on January 1, 2012, based on
8% annual compounding?
d. How much will be in your account if the three payments begin on January 1, 2009?
Individual assignments

1. You want to buy a house within 3 years, and you are currently saving for the down payment.
You plan to save $5,000 at the end of the first year, and you anticipate that your annual
savings will increase by 10% annually thereafter. Your expected annual return is 7%. How
much will you have for a down payment at the end of Year 3?
2. Stock A has an expected return of 7%, a standard deviation of expected returns of 35%, a
correlation coefficient with the market of –0.3, and a beta coefficient of –0.5. Stock B has an
expected return of 12%, a standard deviation of returns of 10%, a 0.7 correlation with the
market, and a beta coefficient of 1.0. Which security is riskier? Why?
3. Assume that the risk-free rate is 6% and the expected return on the market is 13%. What is
the required rate of return on a stock with a beta of 0.7?
4. A stock has a required return of 11%, the risk-free rate is 7%, and the market risk premium is
4%.
a. What is the stock’s beta?
b. If the market risk premium increased to 6%, what would happen to the stock’s required
rate of return? Assume that the risk-free rate and the beta remain unchanged