hw2a_answers_fall07

# hw2a_answers_fall07 - FIN U201 Financial Management...

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FIN U201 - Financial Management - Homework Assignment 2a Goettle - Fall 2007 Q1 a. 12.71% b. 12.00% c. 10.22% d. 12.81% e. 8.95% Q2 a. \$783.71 b. \$1,072.10 Q3 D0 D1 D2 D3 D4 Growth 25% 25% 25% 10% Div. Amount \$2.55 \$3.19 \$3.98 \$4.98 \$5.48 P3 (Terminal Value) = D4/(k-g) = \$5.48/(0.15-0.10) \$109.57 D1 D2 D3+P3 \$3.19 \$3.98 \$114.55 P0 (Share Price) = NPV(D1, D2, D3+P3) \$81.10 Q4 k = (D1/P0) + g 15% k = krf + (km - krf) * beta or 15% = 7% + (10% - 7%) * beta Solving for beta = (k - krf) / (km - krf) = (0.15-0.07)/(0.10-0.07) 2.67 Q5 Cost of debt pre-tax 10.84% rate(10,100,-1000+50,1000) after-tax 6.51% Cost of preferred stock 11.46% Cost of retained earnings 13.50% (6/80)+0.06 Cost of common stock 14.33% (6/(80-8))+0.06 Retained earnings break point 500000 WACC below break point 40%, 15%, 45% 10.40% debt, preferred stock, ret. earn. WACC above break point 40%, 15%, 45%

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10.77% debt, preferred stock, common stock Q6 Cost of debt after-tax 5.85% Cost of retained earnings 13.07% Cost of common stock
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hw2a_answers_fall07 - FIN U201 Financial Management...

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