1. Common stock valuation) The common stock of NCP paid $1.21 in dividends last year. Dividends are expected to grow at an annual rate of 6.40 percent for an indefinite number of years. a. If your required rate of return is 9.30 percent, what is the value of the stock for you? b. Should you make the investment 2. (NPV, PI, and IRR calculations) Fijisawa, Inc. is considering a major expansion of its product line and has estimated the following cash flows associated with such an expansion. The initial outlay would be $1,960,000, and the project would generate cash flows of $380,000 per year for six years. The appropriate discount rate is 4.0 percent. a. Calculate the net present value. b. Calculate the profitability index. c. Calculate the internal rate of return. d. Should this project be accepted? Why or why not 3. (Cost of common equity) The common stock for the Hetterbrand Corporation sells for $59.17, and the last dividend paid was $2.24. Five years ago the firm paid $1.54 per share, and dividends are expected to grow at the same annual rate in the figure as they did over the past five years. a. What is the estimated cost of common equity to the firm using the dividend growth model? (Round to 2 decimal places.) b. Hetterbrand’s CFO has asked his financial analyst to estimate the firm’s cost of common equity using the CAPM as a way of validating the earlier calculations. The risk-free rate of interest is currently 4.1 percent, the market risk premium is estimated to be 4.2 percent, and Hetterbrand’s beta is 0.78. What is your estimate of the firm’s cost of common equity using this method? (Round to 2 decimal places.) 4. (Cost of debt) Temple-Midland, Inc. is issuing a $1,000 par value bond that pays 8.1 percent annual interest and matures in 15 years. Investors are willing to pay $948 for the bond and Temple faces a tax rate of 32 percent. What is Temple’s after-tax cost of debt on the bond? 5. Weighted average cost of capital) The target capital structure for QM Industries is 37 percent common stock, 8 percent preferred stock, and 54 percent debt. If the cost of common equity for the firm is 17.6 percent, the cost of preferred stock is 10.6 percent, the before-tax cost of debt is 7.7 percent, and the firm’s tax rate is 34 percent, what is QM’s weighted average cost of capital?
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