HOMEWORK 8, FINC 635
Fall 2017
You MUST submit every homework assignment to be eligible to take the upcoming exam. All homework
assignments MUST be done on your own. No collaboration is allowed. You can talk to the instructor or
the TA if you have questions.
Keep all the calculations with 4 decimals. Always show your calculations.
Due: 18:25 pm, November 8
Late homework: no credit will be given; however, you still must submit it
Submit to: instructor ([email protected])
Total points possible: 100
1.
SHOW YOUR CALCULATIONS (12 points):
The Company's stock sells for $20 per share, its last dividend (D0) was $1.00, and its growth rate
is a constant 6 percent.
What is its cost of common stock, rs?
r
s
=1(1.06)/20+0.06=0.053+0.06=0.113=11.3%
2.
SHOW YOUR CALCULATIONS (12 points):
The Corporation has a marginal tax rate of 40 percent. The last dividend paid by the Corporation
was $0.90.
Its common stock is selling for $8.59 per share, and its expected growth rate in
earnings and dividends is 5 percent.
What is
the Corporation’s
cost of common stock?
r
s=0.9(1.05)/8.59+0.05=0.16=16%
3.
SHOW YOUR CALCULATIONS (12 points):
A company’s balance sheets show a total of $30 million long
-term debt with a coupon rate of 9
percent.
The yield to maturity on this debt is 11.11 percent, and the debt has a total current
market value of $25 million.
The balance sheets also show that that the company has 10 million
shares of stock; the total of common stock and retained earnings is $30 million.
The current stock
price is $7.5 per share.
The current return required by stockholders, rS, is 12 percent.

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