Rollinsford Company Finance Assignment Help With Solution
1. The corporate treasurer of Rollinsford Company expects the company to grow at 3% in the future, and debt securities at 4% interest (tax rate = 35%) to be a cheaper option to finance the growth. The current market price per share of its common stock is $39, and the expected dividend in one year is $1.50 per share. Calculate the cost of the company’s retained earnings and check if the treasurer’s assumption is correct.
The risk-free rate on 30 year U.S. Treasury bonds is 3.25% and the expected rate of return on the overall stock market is 12%. The company has a beta of 1.6. What is the cost of equity?
(b)Less argues that the 10 year note is a better risk free rate at 2%. He also argues that the stock market is too high and the expected return is really only 5%. Assume that he is correct. The company has a beta of 1.6. What is the cost of equity?
3 A company, West Berwick Enterprises, has a capital structure as follows:
Total Capital $1,000,000
Preferred Stock $100,000
Common Equity $500,000
What would be the minimum expected return from a new capital investment project to satisfy the suppliers of the capital? Assume the applicable tax rate is 40%, interest on debt is 7%, flotation cost per share of preferred stock is $0.75, and flotation cost per share of common stock is $4. The preferred and common stocks are selling in the market for $26 and $143 a share respectively, and they are expected to pay a dividend of $1.50 and $4.50, respectively, in one year. The company’s dividends are expected to grow at 7% per year. The firm would like to maintain the existing capital structure to finance the new project.
4. West Berwick is considering two projects for a new investment, but it can afford only one. It has determined that the appropriate discount rate is 7.39%. Please answer the following questions based on the data below:
Net Cash Flow
Year Project A Project B
0 -$4,000,000 -$5,000,000
1 $800,000 $1,900,000
2 $1,000,000 $1,700,000
3 $1,200,000 $1,400,000
4 $1,400,000 $900,000
5 $1,600,000 $300,000
4-A Calculate the payback period for each project
B Calculate the net present value for each project.
4-C Which project do you think will be approved, if only one project can be approved? Why?
D What if the required rate of return was 10%?
E What is the Internal rate of return?
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5. A corporate bond has a face value of $1,000 and an annual coupon interest rate of 7%. Interest is paid annually. 10 years of the life of the bond remain. The current market price of the bond is $1232. To the nearest 1/100 0f 1 percent, what is the yield to maturity (YTM) of the bond
6. Kennebunk Manufacturing is expected to pay a dividend of $8 per share next year. The dividend growth rate is expected to continue to be 3%. Required rate of return is 7%. What should be the current market price per share?
b.If you buy the stock in Kennebunk (above) at $185 and the stock price grows at the expected rate, What would be your percent return after one year?
7. On January 15, 2013, A common stock sells for $82 per share, has a growth rate of 7% and a dividend that was just paid of $3.82 in December 2012. What is the annual percent yield per share?
8. A corporate bond has a face value of $1,000 and an annual coupon interest rate of 6%. Interest is paid annually. 12 years of the life of the bond remain. The current market price of the bond is $1,127, and it will mature at $1,000. To the 1/10 percent, what is the yield to maturity (YTM) of the bond today?
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