hw 12.pdf - Review Test Submission HW 12 4172-69100...

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4/5/2017 Review Test Submission: HW 12 – 4172-69100 ; 1/11 LT Fin & Cap Struc 12‐15 Review Test Submission: HW 12 H Review Test Submission: HW 12 User Emily Mahapatra Course 2017Spring‐FIN 310 Finance LEC Test HW 12 Started 4/4/17 3:58 PM Submi ed 4/5/17 10:50 AM Due Date 4/5/17 11:59 PM Status Completed A empt Score 35 out of 59 points Time Elapsed 18 hours, 52 minutes Results Displayed All Answers, Submi ed Answers, Correct Answers, Feedback, Incorrectly Answered Quesঞons Quesঞon 1 Stock in CDB Industries has a beta of 1.12. The market risk premium is 7.2 percent, and T­bills are currently yielding 4.2 percent. CDB’s most recent dividend was $3.60 per share, and dividends are expected to grow at a 5.2 percent annual rate indefinitely. Required: If the stock sells for $58 per share, what is your best estimate of CDB’s cost of equity? (Do not include the percent sign (%). Round your answer to 2 decimal places (e.g., 32.16).) cost of equity: % Selected Answer: 11.99 Correct Answer: 12 Answer range +/‐ 0.1 (11.9 ‐ 12.1) Response Feedback: Explanation: We have the information available to calculate the cost of equity, using the CAPM and the dividend growth model. Using the CAPM, we find: R E = 0.042 + 1.12(0.072) = 0.1226 or 12.26% And using the dividend growth model, the cost of equity is R E = [$3.60(1.052)/$58] + 0.052 = 0.1173 or 11.73% Both estimates of the cost of equity seem reasonable based on the historical return on large capitalization stocks. Given this, we will use the average of the two, so: R E = (0.1226 + 0.1173)/2 = 0.1200 or 12.00% Quesঞon 2 My Blackboard 4 out of 4 points 6 out of 6 points Emily Mahapatra 87
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4/5/2017 Review Test Submission: HW 12 – 4172-69100 ; 2/11 Mullineaux Corporation has a target capital structure of 64 percent common stock, 9 percent preferred stock, and 27 percent debt. Its cost of equity is 12.9 percent, the cost of preferred stock is 5.9 percent, and the cost of debt is 7.6 percent. The relevant tax rate is 40 percent. Required: (a) What is Mullineaux’s WACC? [f] (b) What is the after­tax cost of debt? [q] Selected Answer: Mullineaux Corporation has a target capital structure of 64 percent common stock, 9 percent preferred stock, and 27 percent debt. Its cost of equity is 12.9 percent, the cost of preferred stock is 5.9 percent, and the cost of debt is 7.6 percent. The relevant tax rate is 40 percent. Required: (a) What is Mullineaux’s WACC? 10.02 (b) What is the after­tax cost of debt? 4.56 Answers: Mullineaux Corporation has a target capital structure of 64 percent common stock, 9 percent preferred stock, and 27 percent debt. Its cost of equity is 12.9 percent, the cost of preferred stock is 5.9 percent, and the cost of debt is 7.6 percent. The relevant tax rate is 40 percent.
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