# week 5 hw, stocks, bonds, dividends

1. Torch Industries can issue perpetual preferred stock at a price of \$55.50 a share. The stock would pay a constant annual dividend of \$6.00 a share. What is the company’s cost of preferred stock, rp? Round your answer to two decimal places.

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2. Holt Enterprises recently paid a dividend, D0, of \$3.25. It expects to have nonconstant growth of 22% for 2 years followed by a constant rate of 9% thereafter. The firm’s required return is 14%.

1. How far away is the horizon date? ( pick the roman      numeral)
1. The terminal, or horizon, date is the date when the       growth rate becomes nonconstant. This occurs at time zero.
2. The terminal, or horizon, date is the date when the       growth rate becomes constant. This occurs at the beginning of Year 2.
3. The terminal, or horizon, date is the date when the       growth rate becomes constant. This occurs at the end of Year 2.
4. The terminal, or horizon, date is infinity since       common stocks do not have a maturity date.
5. The terminal, or horizon, date is Year 0 since the       value of a common stock is the present value of all future expected       dividends at time zero.

1. What is the firm’s horizon, or continuing, value? Do      not round intermediate calculations. Round your answer to the nearest      cent.

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1. What is the firm’s intrinsic value today, ? Do not      round intermediate calculations. Round your answer to the nearest cent.

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3. Tresnan Brothers is expected to pay a \$2.80 per share dividend at the end of the year (i.e., D1 = \$2.80). The dividend is expected to grow at a constant rate of 8% a year. The required rate of return on the stock, rs, is 15%. What is the stock’s current value per share? Round your answer to two decimal places.

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4. Computech Corporation is expanding rapidly and currently needs to retain all of its earnings; hence, it does not pay dividends. However, investors expect Computech to begin paying dividends, beginning with a dividend of \$1.75 coming 3 years from today. The dividend should grow rapidly-at a rate of 36% per year-during Years 4 and 5; but after Year 5, growth should be a constant 10% per year. If the required return on Computech is 14%, what is the value of the stock today? Do not round intermediate calculations. Round your answer to the nearest cent.

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5. Travis Industries plans to issue perpetual preferred stock with an \$11.00 dividend. The stock is currently selling for \$114.50, but flotation costs will be 6% of the market price, so the net price will be \$107.63 per share. What is the cost of the preferred stock, including flotation? Round your answer to two decimal places.

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6. Jarett & Sons’s common stock currently trades at \$38.00 a share. It is expected to pay an annual dividend of \$2.00 a share at the end of the year (D1 = \$2.00), and the constant growth rate is 4% a year.

1. What is the company’s cost of common equity if all of      its equity comes from retained earnings? Do not round intermediate      calculations. Round your answer to two decimal places.
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2. If the company issued new stock, it would incur a 19%      flotation cost. What would be the cost of equity from new stock? Do not      round intermediate calculations. Round your answer to two decimal places.
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7. Weston Corporation just paid a dividend of \$1.75 a share (i.e., D0 = \$1.75). The dividend is expected to grow 9% a year for the next 3 years and then at 5% a year thereafter. What is the expected dividend per share for each of the next 5 years? Round your answers to two decimal places.

D1 = \$
D2 = \$
D3 = \$
D4 = \$
D5 = \$

8. The Holmes Company’s currently outstanding bonds have an 8% coupon and a 13% yield to maturity. Holmes 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 Holmes’ after-tax cost of debt? Round your answer to two decimal places.

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