UGBA 103 _5 - UGBA 103 Haas School of Business Summer 2010...

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UGBA 103 Summer 2010 Haas School of Business John Gonzales Assignment #5 (Covered in 6/25 Section) 1. Do problems 10-2, 10-3, 10-5, 10-7, 10-10 [(a) and (b) only], 10-15, and 10-16 on pages 369-372 of Brigham and Ehrhardt. For 10-16 , the focus is not on book values, but rather on the market value of current liabilities, long-term debt and common equity (where market value of common equity = market value of common stock). 2. A firm has four investment projects with the following costs and rates of return: Cost Rate of Return Project 1 $2,000 16.00% Project 2 3,000 15.00% Project 3 5,000 13.75% Project 4 2,000 12.50% The company estimates that it can issue debt at a before-tax cost of 10 percent, and the tax rate is 30 percent. The company also can issue preferred stock at $49 per share which pays a constant dividend of $5 per year. The constant dividend growth model is used to find the cost of equity. The company’s stock currently sells at $36 per share. The year-end dividend, D 1 , is expected to be $3.50, and the dividend is expected to grow at a constant rate of 6 percent per year. The
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UGBA 103 _5 - UGBA 103 Haas School of Business Summer 2010...

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