Sara Shouppe Finance Assingment Help With Solution
1. Sara Shouppe has invested $100,000 in an account at her local bank. The bank will pay her a constant amount each year for 6 years, starting one year from today, and the account’s balance will be 0 at the end of the sixth year. If the bank has promised Ms. Shouppe a 10% return, how much will they have to pay her each year?
2. Perot Marketing is expected to pay $2.40 per share in dividends at the end of the next 12 months. The growth rate in dividends is expected to be constant at 9% per year. If the stock is selling for $51.30 per share, what is the required rate of return?
3. The Weatherfield Way Construction Company has common and preferred stock outstanding. The preferred stock pays an annual dividend of $7.50 per share, and the required rate of return for similar preferred stocks is 11%. The common stock paid a dividend of $3.00 per share last year, but the company expected that earnings and dividends will grow by 25% for the next two years before dropping to a constant 9% growth rate afterward. The required rate of return on similar common stocks is 13%
What is the per-share value of the company’s preferred and common stock?
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4. Zinger Corporation manufactures industrial type sewing machines. Zinger Corp. received a very large order from a few European countries. In order to be able to supply these countries with its products, Zinger will have to expand its facilities. Of the required expansion, Zinger feels it can raise $75 million internally, through retained earnings. The firm’s optimum capital structure has been 45% debt, 10% preferred stock, and 45% equity. The company will try to maintain this capital structure in financing this expansion plan. Currently Zinger’s common stock is traded at a price of $20 per share. Last year’s dividend was $1.50 per share. The growth rate has been at 6% and is expected to increase to 8%. The company’s preferred stock is selling at $50 and has been yielding 6% in the current market. Flotation costs have been estimated at 8% of common stock and 3% of preferred stock. Zinger Corp. has bonds outstanding at 10%, but its investment dealer has informed the company that interest rates for bonds of equal risk are currently yielding 9%. Zinger’s tax rate is 46%.
A) Compute the cost of Kd, Kp, Ke, Kn.
B) Calculate the weighted average cost of capital, assuming no external equity financing.
C) How much can Zinger raise to fund the whole project, while using only internal financing?
5. Golden Corporation is considering the purchase of new equipment costing $200,000. The expected life of the equipment is 10 years. It is expected that the new equipment can generate an increase in net income of $35,000 per year for the next 10 years. The probabilities for the increase in net income depend on the state of the economy.
The equipment can be amortized using straight-line amortization for tax purposes. Golden’s cost of capital is 14%. What is the expected NPV? Should they purchase the new equipment?
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