# Week 5 hw, stocks, bonds, dividends

1. Torch Industries can issue perpetual preferred stock at a price of $55.50 a share. The stock would pay a constant annual dividend of $6.00 a share. What is the company’s cost of preferred stock, rp? Round your answer to two decimal places.

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2. Holt Enterprises recently paid a dividend, D0, of $3.25. It expects to have nonconstant growth of 22% for 2 years followed by a constant rate of 9% thereafter. The firm’s required return is 14%.

- How far away is the horizon date? ( pick the roman numeral)
- The terminal, or horizon, date is the date when the growth rate becomes nonconstant. This occurs at time zero.
- The terminal, or horizon, date is the date when the growth rate becomes constant. This occurs at the beginning of Year 2.
- The terminal, or horizon, date is the date when the growth rate becomes constant. This occurs at the end of Year 2.
- The terminal, or horizon, date is infinity since common stocks do not have a maturity date.
- The terminal, or horizon, date is Year 0 since the value of a common stock is the present value of all future expected dividends at time zero.

- What is the firm’s horizon, or continuing, value? Do not round intermediate calculations. Round your answer to the nearest cent.

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- What is the firm’s intrinsic value today, ? Do not round intermediate calculations. Round your answer to the nearest cent.

$

3. Tresnan Brothers is expected to pay a $2.80 per share dividend at the end of the year (i.e., D1 = $2.80). The dividend is expected to grow at a constant rate of 8% a year. The required rate of return on the stock, rs, is 15%. What is the stock’s current value per share? Round your answer to two decimal places.

$

4. Computech Corporation is expanding rapidly and currently needs to retain all of its earnings; hence, it does not pay dividends. However, investors expect Computech to begin paying dividends, beginning with a dividend of $1.75 coming 3 years from today. The dividend should grow rapidly-at a rate of 36% per year-during Years 4 and 5; but after Year 5, growth should be a constant 10% per year. If the required return on Computech is 14%, what is the value of the stock today? Do not round intermediate calculations. Round your answer to the nearest cent.

$

5. Travis Industries plans to issue perpetual preferred stock with an $11.00 dividend. The stock is currently selling for $114.50, but flotation costs will be 6% of the market price, so the net price will be $107.63 per share. What is the cost of the preferred stock, including flotation? Round your answer to two decimal places.

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6. Jarett & Sons’s common stock currently trades at $38.00 a share. It is expected to pay an annual dividend of $2.00 a share at the end of the year (D1 = $2.00), and the constant growth rate is 4% a year.

- What is the company’s cost of common equity if all of its equity comes from retained earnings? Do not round intermediate calculations. Round your answer to two decimal places.

% - If the company issued new stock, it would incur a 19% flotation cost. What would be the cost of equity from new stock? Do not round intermediate calculations. Round your answer to two decimal places.

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7. Weston Corporation just paid a dividend of $1.75 a share (i.e., D0 = $1.75). The dividend is expected to grow 9% a year for the next 3 years and then at 5% a year thereafter. What is the expected dividend per share for each of the next 5 years? Round your answers to two decimal places.

D1 = $

D2 = $

D3 = $

D4 = $

D5 = $

8. The Holmes Company’s currently outstanding bonds have an 8% coupon and a 13% yield to maturity. Holmes believes it could issue new bonds at par that would provide a similar yield to maturity. If its marginal tax rate is 35%, what is Holmes’ after-tax cost of debt? Round your answer to two decimal places.

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