Assignment
Part 1 - Capital Market History
1. If you 100 shares of stock for $4439 and in a year, you sell the shares for $49.67 per share, what is your capital gain (dollar amount) and your capital gain percentage?
2. If you received dividends of $165 during the year, what was your dividend yield? What was your total return for the year?
Consider a series of returns for a 10 year period:
|
Year
|
Return
|
|
1
|
3.5%
|
|
2
|
13.3%
|
|
3
|
-2.7%
|
|
4
|
-23.5%
|
|
5
|
13.9%
|
|
6
|
24.3%
|
|
7
|
8.7%
|
|
8
|
2.1%
|
|
9
|
33.2%
|
|
10
|
-8.9%
|
3. What is the average rate of return?
4. What is the standard deviation of returns?
5. What is the holding period return for the 10 years? (Hint: If you started with $100, how much would you end up with after 10 years?)
6. What is the geometric average rate of return?
Consider a stock with the following information on a per share amount:
|
Year
|
Price
|
Dividend
|
Cap Gain
|
Div
|
|
0 (Initial Purchase)
|
33.95
|
n/a
|
|
|
|
1 (first year of holding stock)
|
34.25
|
1.01
|
0.88%
|
2.97%
|
|
2
|
33.06
|
1.04
|
-3.47%
|
3.04%
|
|
3
|
36.19
|
1.08
|
9.47%
|
3.27%
|
|
4
|
37.22
|
1.13
|
2.85%
|
3.12%
|
|
5
|
35.25
|
1.20
|
-5.29%
|
3.22%
|
|
6
|
39.97
|
1.28
|
13.39%
|
3.63%
|
7. What are the capital gains, dividend yields and total returns for each of the 6 years that you hold the stock?
8. What is the average rate of return?
9. What is the geometric average rate of return?
Part Two - WACC Calculations
Summerdahl's common stock is currently trading at $36 per share. The stock is expected to pay a dividend of $3.00 per share at the end of the year and the dividend is expected to grow at a constant rate of 5% per year. What is the cost of common equity?
BooBoo Bookstores has a beta of 0.8. The yield on a 3-month T-Bill is 1.1% and the market risk premium is 6.6%. What is the estimated cost of equity using CAPM?
A company's 6% coupon rate, semiannual payment, $1000 par value bond that matures in 20 years sells for $545. The company's marginal tax rate (state plus federal) is 35%. What is the firm's after-tax cost of debt for the purposes of calculating WACC.
An analyst has collected the following information regarding Christopher Co.:
• The company's capital structure is 50% common equity, 10% preferred equity and 40% debt.
• The yield to maturity on the company's bonds is 9 percent.
• The company's year-end dividend on common stock is forecasted to be $0.80 a share.
• The company expects that its dividend will grow at a constant rate of 9 percent a year.
• The company's stock price is $25.
• The company's preferred stock is priced at $20 and has a dividend of $2.20 per share.
• The company's tax rate is 40 percent.
• The company anticipates that it will need to raise new common stock and preferred stock this year. Its investment bankers anticipate that the total flotation cost will equal 5 percent of the amount issued. Assume the company accounts for flotation costs by adjusting the cost of capital. Given this information, calculate the company's WACC.