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problem1: The Hart Mountain Company is expected to experience an unusually high growth rate (20%) during the next 3 years. However, in the fourth year the firm is expected to begin growing at a constant long-term growth rate of 8 percent. During the rapid growth period, the firm's dividend payout ratio will be relatively low (20%) in order to conserve funds for reinvestment. However, the decrease in growth in the fourth year will also be accompanied by an increase in the dividend payout to 50%. Last year's earnings were E0 = $2.00 per share and the firm's required return is 10 percent. What should be the current price of the common stock?

[A] $71.54

[B] $61.78

[C] $93.50

[D] $66.50

[E] $87.96 

problem2: Heino In hired you as a consultant to help them estimate their cost of capital. You have been provided with the following data: rRF = 5.0%; RPM = 5.0%; and b = 1.1. Based on the CAPM approach, what is the cost of equity from retained earnings?

[A] 10.88%

[B] 11.03%

[C] 11.14%

[D] 10.50%

[E] 10.71%

problem3:  The common stock of Anthony Steel has a beta of 1.20. The risk-free rate is 5% and the market risk premium is 6%. Suppose the firm will be able to use retained earnings to fund the equity portion of its capital budget. What is the company's cost of retained earnings, rs?

[A] 11.0%

[B] 12.2%

[C] 12.4%

[D] 7.0%

[E] 7.2% 

problem4:  Holmgren Hotels' stock has a required return of 11 percent. The stock currently does not pay a dividend but it expects to begin paying a dividend of $1.00 per share starting five years from today ($1.00). Once established the dividend is expected to grow by 25% per year for two years, after which time it is expected to grow at a constant rate of 10 percent per year. What should be Holmgren's stock price today?

[A] $84.80

[B] $ 174.34

[C] $ 76.60

[D] $ 94.13

[D] $ 77.27 

problem5:  Rhino In hired you as a consultant to help them estimate their cost of capital. You have been provided with the following data: D1 = $1.30; P0 = $40.00; and g = 7% (constant). Based on the DCF approach, what is the cost of equity from retained earnings?

[A] 9.66%

[B] 9.84%

[C] 9.97%

[D] 10.08%

 

[E] 10.25%

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