homework #13.doc - FINA 370 Corporate Finance Chad Meese Homework#13 1 The Troxel Co just issued a dividend of \$2.30 per share on its common stock The

# homework #13.doc - FINA 370 Corporate Finance Chad Meese...

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FINA 370 Chad Meese Corporate Finance Homework #13 1. The Troxel Co. just issued a dividend of \$2.30 per share on its common stock. The company is expected to maintain a constant 6 percent growth rate in its dividends indefinitely. If the stock sells for \$42 a share, what is the company’s cost of equity? R E = [\$2.30(1.06)/\$42] + .06 = .118 or 11. 8 % 2. Stock in CDB Industries has a beta of 1.15. The market risk premium is 8 percent, and T-bills are currently yielding 4 percent. CDB’s most recent dividend was \$1.80 per share, and dividends are expected to grow at a 5 percent annual rate indefinitely. If the stock sells for \$34 per share, what is your best estimate of CDB’s cost of equity? R E1 = .04 + 1.15(.08) = .132 R E2 = [\$1.80(1.05)/\$34] + .05 = .1056 Average R E = (.1320 + .1056)/2 = .1188 or 11.88 % 3. Big Show Bank has an issue of preferred stock with a \$7.50 stated dividend that just sold for \$93 per share. What is the bank’s cost of preferred stock? R p = \$7.50/\$93 = .0806 or 8.06 % 4. Peyton’s Colt Farm issued a 30-year, 8 percent semiannual bond 8 years ago.

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