Structured Finance Week 4

# Structured Finance Week 4 - Structured Finance Homework_4 1...

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Structured Finance Homework_4 1

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E xercise 7.2 7-2 Constant Growth Valuation 1. Data: P 0 = D 1 ( r s g ) D 1 = \$1.5 g = 7% r s = 15% P 0 = ? 2. Calculations P 0 = (D 1 )/(r s – g) = 2.5/.08 = \$18.75 Answer: The Value per share of Boehm’s stock is \$18.75 2
E xercise 7.4 7-4 Preferred Stock Valuation Data: V ps = \$5 D ps = \$50 r ps = ? Calculations: V ps = D ps ÷ r ps r ps = D ps / V ps r ps = 10% Answer: The stock’s required rate of return is 10%. 3

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E xercise 7.5 7-5 Non-constant Growth Valuation Data: V ps = Dps ÷ rps b = 1.2 Year 1 P 1 = (D1)/(g +1) D 1 = D 0 + 1 = \$3 P 1 = 3/(1+0.2) = 2.5 P 2 = 3/(1.07) = 2.8037 Answer: The estimate of the stock’s current price is \$ 5.3037 4
After-Tax Cost of Debt 1. Data: r d = 8% = 0.08 Tax Rate = 35% = 0.35 After Tax cost of debt = ? 2. Calculations: LL’s after-tax cost of debt is: r d (1-T) = 0.08 * (1- 0.35) = 0.08* (0.65) = 0.052 =5.2% Answer: The LL’s after-tax cost of debt is 5.2%. 5

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Structured Finance Week 4 - Structured Finance Homework_4 1...

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