Find the required return on their stock using CAPM?
A company has 9,000,000 shares of stock outstanding with a price
Subject: Business / Finance
Question
Use the following information for questions 5-11. A company has 9,000,000 shares of stock outstanding with a price of $60 per share. The firm just paid a dividend of $3 and the dividend is expected to grow at a constant rate of 5% forever. The stock has a beta of .9, the risk free rate is 3% and the Market Risk Premium is 7%. The firm also has 200,000 bonds outstanding at a price of $950 per bond. The bonds mature in 9 years, have a face value of $1,000, and have a coupon rate of 6% with semiannual payments. The firm expects to change their capital structure and will have a future debt ratio of 70%, a cost of equity (required return) of 14%, and a cost of debt (Yield to Maturity) of 9%. The firm has a marginal tax rate of 40%.
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5. What is the required return on their stock using CAPM?
a) 8.8% b) 9.3% c) 10.25% d) 11.4% e)12.7%
6. What is the expected return on their stock using the constant growth dividend discount model?
a) 8.8% b) 9.3% c) 10.25% d) 11.4% e)12.7%
7. What is the yield to maturity on their debt (Cost of Debt)?
a) 5.75% b) 6.25% c) 6.75% d) 7.25% e) 7.75%
8. What is their current percent debt using market value capital structure?
a) 26% b) 35% c) 54% d) 65% e) 82%
9. What is their Weighted Average Cost of Capital using their future expected capital structure, cost of equity and cost of debt?
a) 7.4% b) 8% c) 8.3% d) 9.1% e) 10.4%
10. What will be their new stock price given the new required return?
a) $24 b) $35 c) $42 d) $56 e) $62
11. What will be their new bond price given the new Yield to Maturity?
a) $818 b) $882 c) $974 d) $1,043 e) $1,112
