Questions -

1) You are an analyst in a major investment bank and have been assigned the task of determining the share price of Foodmart, a national supermarket chain. The stock beta is 1.286, Rf=3%, Rm=10%. The cost of debt is 6.82%. The tax rate is 34% and the firm is 40% debt financed. Calculate the WACC for Foodmart. The firm's expected cash flow for this year is $60 million. After considerable analysis you have concluded that cash flows will grow at 6% per year for 6 years, followed by normal growth of 2% forever. The firm has $300 million in debt and 42 million shares outstanding. Calculate the target price.

2) XYZ corp has a stable payout ratio of 40%. Last years EPS was $8.40. It expects growth in earnings of 3% forever. K=8%. The price of the stock should be.

3) Bell computers paid $2.70 dividends last year and had growth in dividends of 16% per year over the last few years. It expects growth will decline to a normal growth rate of 4% over a transition period of 6 years. Ke=12%. The stock price should be.

4) General Food Company's latest annual dividend of $2.30 was paid yesterday. You believe the growth rate will be between 4.5% and 5% forever. Your required rate of return is 11%. If the stock is currently selling for $38.50, what should be you investment recommendation?

5) South Florida Logistics corp has a stable payout ratio of 25%. Its ROE averages 12%. The cost of equity capital is 10%. It just paid a dividend of $2.00. After two years its dividend/share is expected to be.

6) Microsoft Corp is planning to issue stocks and use the proceeds to retire debt. This is expected to reduce its debt to equity ratio from 70% to 40%. Its beta is currently 1.4 and the tax bracket is 34%. What will happen to its beta after the restructuring of the balance sheet?