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

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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.

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• Spring '08
• sloan
• Finance, dividend payout ratio, floating rate bond, Current Price CS

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