Exam3 - Kd = Yield(1 T a Aftertax cost of debt = 6.0(1 20 =...

Info icon This preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
K d = Yield (1 − T) a. Aftertax cost of debt = 6.0% × (1 – 20%) = 4.80 Current = D p / P p yield = (.05 (5%) × $100 (parvalue)) / $65 = .0769, or 7.69% Ke (Cost of RE) = D 1 / P 0 + g | (Dividend) / (Current Price CS + Growth Rate) Kn *Cost of NewCS = D 1 / (P 0 − F) + g | (Dividend) / (( Current Price CS – Flotation Cost) + Growth Rate) Compound annual rate of growth EPS n = EPS 0 × (1 + g ) n project earnings for next year (E 1 ) E1 = E0 (1 + g) Assume the dividend payout ratio is 50 percent. Compute D 1 D1 = E1 × Dividend payout ratio , = $1.22 × .50 Debt (Kd)= Yield (1 − T) Preferred stock (Kp) = Dp / (Pp − F) Common equity (Ke) = D1 / P0 + g Industry P/E = (1 − .20) × 30 (Given 30 and 20%) Initial P/E ratio = 24 + 2.5 = 26.5 Underwriting spread = (Public Price - Net to Coorporation) / Public Price Earnings per share = reported earning / current shares of stock Dilution: Before – After Stock Issue = $$$ per share Assume the Louisiana Timber Company can earn 10.70 percent on the proceeds of the stock issue in time to include it in the current year’s results. Calculate earnings per share. Net income = $6,770,000 + .107 ($1,000,000 × $34) = $10,408,000; Earnings per share after additional income: EPS = $10,408,000 / 3,000,000 = $3.47 The Pioneer Petroleum Corporation has a bond outstanding with an $70 annual interest payment, a market price of $840, and a maturity date in four years. Assume the par value of the bond is $1,000. Current yieldBond X = annual interest / market value He should select Bond X. It has a higher current yield. Yes. The current yield is based on the current discounted value of the bond. The yield to maturity recognizes that the discount must be recovered over the remaining life of the bond.
Image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern