7-2 Immutable Growth Valuation Boehm Incorporated is expected to pay a $1. 50 per portion-out dividend at the end of this year (i. e. , D1 = $1. 50). The dividend is expected to advance at a immutable blame of 7% a year. The required blame of produce on the store, rs, is 15%. What is the prize per portion-out of Boehm’s store? P = D1/(rs – g) Expense = $1. 50 / (0. 15 - 0. 07) = $18. 75 7-4 Preferred Store Valuation Nick’s Enchiladas Incorporated has preferred store uncollected that pays a dividend of $5 at the end of each year. The preferred sells for $50 a portion-out.
What is the store’s required blame of produce? Vps = Dps/Rps Vps = $5/$50 = 10% 7-5 Non-immutable Growth Valuation A crew prevalently pays a dividend of $2 per portion-out (D0 = $2). It is honord that the crew’s dividend conciliate advance at a blame of 20% per year for the proximate 2 years, then at a immutable blame of 7% thereafter. The crew’s store has a beta of 1. 2, the facilitate- permitted blame is 7. 5%, and the chaffer facilitate bribe is 4%. What is your honor of the store’s prevalent expense? Store Return| 16. 50%| =0. 075+1. 2*(0. 115-0. 04)| Discounted| | | D1| 2. 0| =2*(1. 2)^1| 2. 06| =2. 40/(1+|0. 0165|)^1| D2| 2. 88| =2*(1. 2)^2| 2. 12| =2. 88/(1+|0. 0165|)^2| D3| 3. 08 | =2. 88*(1. 07) | | | | P2| 32. 44| =(3. 08)/(0. 0165-0. 07)| 23. 90| =32. 44/(1+|0. 0165|)^2| Stocks Prevalent Price| | 28. 08| | | 9-2 After-Tax Consume of Obligation LL Incorporated’s prevalently uncollected 11% coupon bonds keep a produce to ripeness of 8%. LL believes it could consequence new bonds at par that would get a harmonious produce to ripeness. If its final tax blame is 35%, what is LL’s after-tax consume of obligation? d(1 - T) = 0. 08(0. 65) = 5. 2%. 9-4 Consume of Preferred Store after a while Flotation Costs Burnwood Tech plans to consequence some $60 par preferred store after a while a 6% dividend. A harmonious store is selling on the chaffer for $70. Burnwood must pay flotation consumes of 5% of the consequence expense. What is the consume of the preferred store? Ep = Dividend/ Chaffer Expense – Flotation Costs =($60*0. 06)/(($70-($70*0. 05))= 5. 41% 9-5 Consume of Equity - DCF Summerdahl Resort’s spiritless store is prevalently trading at $36 a portion-out. The store is expected to pay a dividend of $3. 0 a portion-out at the end of the year (D1 = $3. 00), and the dividend is expected to advance at a immutable blame of 5% a year. What is its consume of spiritless equity? P0 = $36; D1 = $3. 00; g = 5%; rs= ? rs = D1/P0+ g = ($3. 00/$36. 00) + 0. 05 = 13. 33% 9-6 Consume of Equity - CAPM Booher Book Stores has a beta of 0. 8. The produce on a 3-month T-bill is 4% and the produce on a 10-year T-bond is 6%. The chaffer facilitate bribe is 5. 5%, and the produce on an middle store in the chaffer decisive year was 15%. What is the honord consume of spiritless equity using the CAPM? s = rRF + bi(RPM) = 0. 06 + 0. 8(0. 055) = 10. 4% 9-7 WACC Shi Importer’s neutralize prevarication shows $300 pet in obligation, $50 pet in preferred store, and $250 pet in entirety spiritless equity. Shi’s tax blame is 40%, rd = 6%, rps = 5. 8%, and rs = 12%. If Shi has a target consummate constituency of 30% obligation, 5% preferred store, and 65% spiritless store, what is its WACC? rd = 6%; T = 40%; rps = 5. 8%; rs = 12%. WACC = (wd)(rd)(1 - T) + (wps)(rps) + (wce)(rs) WACC = 0. 30(0. 06)(1-0. 40) + 0. 05(0. 058) + 0. 65(0. 12) = 9. 17%