Principles of Finance

 Problem 08-1: Preferred Stock Market price The preferred stock of a company pays a dividend of 3.25 SAR. What is the value of the stock if you required return is 9.00 percent? Par value of the stock is 100 SAR. Problem 08-2: Common Stock Market Price If you purchase common stock at 45 SAR per share, hold it for 1 year, and then sell it after a dividend of 5 SAR is paid. How much will the stock price have to appreciate for you to satisfy your required rate of return of 15 percent? Problem 08-3- Preferred Stock Value You are considering an investment in a company’s preferred stock. The preferred stock pays a dividend of 2.25 SAR. Your required retuns is 11 percent. Value the stock. Problem 08-4: Growth Rate A firm’s return on equity is 15 percent and is planning to retain 35 percent of earnings for investment purposes, what will be the firm’s growth rate? Problem 08-5: Dividend Constant Model-Stock Expected Rate of Return A company paid a dividend of 25 SAR last year and the shares are selling for 320 SAR per share. The dividend is expected to grow at 5% indefinitely. What is the stock’s expected rate of return? Problem 08-6: Required Rate of Return (CAPM) A corporation’s stock has a beta of 1.2. The risk-free rate is 7.25% and the expected return on the market is 10.5%. What is the required rate of return on the stock using the Capital Asset Pricing Model (CAPM)? Problem 08-7: Cost of Debt A company issues a  1,000 SAR par value bond that pays 8 percent annual interest and matures in 17 years. Investors are willing to pay 800 SAR  for the bond. Flotation costs will be 3 percent of market value. The company is a 33 percent marginal tax bracket. What will be the firm’s after-tax cost of debt on the bond? Problem 08-8: WACC Calculation The capital structure for a corporation is provided below. The company plans to maintain its debt structure in the future. If the firm has a 5 percent after-tax cost of debt, a 12.5 percent cost of preferred stock, and an 15 percent cost of common stock, what is the firm’s weighted average cost of capital? Captial Structure Bonds 1055 Preferred stock 255 Common Stock 3500