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# 7-2 Constant Growth Valuation Boehm Incorporated is expected

7-2 Constant Growth Valuation
Boehm Incorporated is expected to pay a \$1.50 per share dividend at the end of this year (i.e., D1 = \$1.50). The dividend is expected to grow at a constant rate of 7% a year. The required rate of return on the stock, rs, is 15%. What is the value per share of Boehm’s stock?

(7–4) Preferred Stock Valuation
Nick’s Enchiladas Incorporated has preferred stock outstanding that pays a dividend of \$5 at the end of each year. The preferred sells for \$50 a share. What is the stock’s required rate of return?

(7–5) Non-constant Growth Valuation
A company currently pays a dividend of \$2 per share (D0 = \$2). It is estimated that the company’s dividend will grow at a rate of 20% per year for the next 2 years, then at a constant rate of 7% thereafter. The company’s stock has a beta of 1.2, the risk-free rate is 7.5%, and the market risk premium is 4%. What is your estimate of the stock’s current price?

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unvrs :

P = D1/(r-g) = 1.5/ (15%-7%) = \$18.75

R = 5/50 = 10%

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Customer:

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Customer:

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unvrs :

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unvrs :

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Customer:

9-2 After-Tax Cost of Debt

LL Incorporated’s currently outstanding 11% coupon bonds have a yield to maturity of 8%. LL 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 LL’s after-tax cost of debt?

(9-4) Cost of Preferred Stock with Flotation Costs

Burnwood Tech plans to issue some \$60 par preferred stock with a 6% dividend. A similar stock is selling on the market for \$70. Burnwood must pay flotation costs of 5% of the issue price. What is the cost of the preferred stock?

(9-5) Cost of Equity: DCF

Summerdahl Resort’s common stock is currently trading at \$36 a share. The stock is expected to pay a dividend of \$3.00 a share at the end of the year (D1 = \$3.00), and the dividend is expected to grow at a constant rate of 5% a year. What is its cost of common equity?

(9-6) Cost of Equity: CAPM

Booher Book Stores has a beta of 0.8. The yield on a 3-month T-bill is 4% and the yield on a 10-year T-bond is 6%. The market risk premium is 5.5%, and the return on an average stock in the market last year was 15%. What is the estimated cost of common equity using the CAPM?

(9-7) WACC

Shi Importer’s balance sheet shows \$300 million in debt, \$50 million in preferred stock, and \$250 million in total common equity. Shi’s tax rate is 40%, rd = 6%, rps = 5.8%, and rs = 12%. If Shi has a target capital structure of 30% debt, 5% preferred stock, and 65% common stock, what is its WACC?

Customer:

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Customer:

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Customer: Customer/p>
Customer:

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unvrs :

unvrs :

Customer:

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Customer:

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