FIN500: The Cost of Capital

Problem 11-1: Preferred Stock Valuation

What is the value of a preferred stock when the dividend rate is 16 percent on a 100 SAR par value? The appropriate discount rate for a stock of this risk level is 12 percent.

Problem 11-2: Common Stock Valuation

MMS Corporation’s common stock paid 1.32 SAR in dividends last year and is expected to grow indefinitely at an annual 7 percent rate. What is the value of the stock if you require an 11 percent return?

Problem 11-3- Preferred Stock Valuation

Calculate the value of a preferred stock that pays a dividend of 6 SAR per share if your required rate of return is 12 percent.

Problem 11-4: Growth Rate

In April of this past year, MCC Electric was evaluating the cost of equity capital for the firm. The firm’s shares are selling for 45.00 SAR; it expects to pay an annual cash dividend of 4.50 SAR a share next year, and the firm’s investors anticipate an annual rate of return of 18 percent.

  1. If the firm is expected to provide a constant annual rate of growth in dividends, what rate of growth must the firm experience?

Problem 11-5: Cost of Preferred Stock

The preferred stock of TSP Company sells for 51 SAR and pays 4.25 SAR in dividends. The net price of the security after issuance costs is 48.00 SAR. What is the cost of capital for the preferred stock?

Problem 11-6: Cost of Equity

The common stock for the BES Corporation sells for 58 SAR. If a new issue is sold, the flotation costs are estimated to be 8 percent. The company pays 50 percent of its earnings in dividends, and a 4 SAR dividend was recently paid. Earnings per share 5 years ago were 5 SAR. Earnings are expected to continue to grow at the same annual rate in the future as during the past 5 years. The firm’s marginal tax rate is 21 percent. Calculate the cost of (a) internal common equity and (b) external common equity.

Problem 11-7: Cost of Debt

CSC Company is issuing a 1,000 SAR par value bond that pays 7 percent annual interest and matures in 15 years. Investors are willing to pay 850 SAR for the bond. Flotation costs will be 3 percent of market value. The company is in a 21 percent marginal tax bracket. What will be the firm’s after-tax cost of debt on the bond?

Problem 11-8: Weighted Average Cost of Capital (WACC)

The capital structure for the CCC Corporation is provided here. The company plans to maintain its debt structure in the future. If the firm has a 5.5 percent after-tax cost of debt, a 13.5 percent cost of preferred stock, and an 18 percent cost of common stock, what is the firm’s weighted average cost of capital?

Bonds                                   1,083

Preferred Stock                                268

Common Stock                 3,681




Powered by WordPress