FIN571 University of Phoenix Rate of Return for Stocks and Bonds Paper

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Nmcra30

Economics

FIN571

University of Phoenix

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VERY IMPORTANT - TWO SUBMISSIONS ARE REQUIRED FOR THIS ASSIGNMENT
Step 1 - (Submit as an Excel spreadsheet)

Calculate the following problems using Microsoft Excel. The calculations must be done in Excel. You must show your work. If you submit these in Word, you will not receive credit. If you do not show your work, you will not receive credit. Examples are provided above for review prior to starting this assignment. FOLLOW MY EXAMPLES!

1. Stock Valuation: A stock has an initial price of $100 per share, paid a dividend of $2.00 per share during the year, and had an ending share price of $125. Compute the percentage total return, capital gains yield, and dividend yield.

2. Total Return: You bought a share of 4% preferred stock for $100 last year. The market price for your stock is now $120. What was your total return for last year?

3. CAPM: A stock has a beta of 1.20, the expected market rate of return is 12%, and a risk-free rate of 5 percent. What is the expected rate of return of the stock?

4. WACC: The Corporation has a targeted capital structure of 80% common stock and 20% debt. The cost of equity is 12% and the cost of debt is 7%. The tax rate is 30%. What is the company's weighted average cost of capital (WACC)?

5. Flotation Costs: Medina Corp. has a debt-equity ratio of .75. The company is considering a new plant that will cost $125 million to build. When the company issues new equity, it incurs a flotation cost of 10%. The flotation cost on new debt is 4%. What is the initial cost of the plant if the company raises all equity externally?

Step 2 - (Submit as a WORD document in APA format)

Provide an overall summary of how companies make financial decisions based on Stock Valuation, Total Return, CAPM, WACC and Flotation Costs. Your outline for your paper should look similar to the following:

· Intro

· Stock Valuation

· Total Return

· CAPM

· WACC

· Flotation Costs

· Conclusion

· References

Each point above should be a paragraph containing 4-5 sentences, with the exception of the references page. There are required references for each assignment. Those are given to you below. So, all you need to do is copy, paste and then proceed to double-space, alphabetize and format into a hanging indent. You should not need to use other references. But if you do, format those using the Reference and Citation Generator Tool (see link below).

Minimum required references include your textbook. The textbook reference is as follows:

Ross, S., Westerfield, R., Jaffe, J. & Jordan, B. (2016). Corporate finance (11th edition). New York, N.Y. McGraw-Hill Education.


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#1 - STOCK VALUATION Danica, Inc. has an initial price of $150 per share, paid a dividend of $2.50 per share during the year, and had an ending share price of $185. Compute the percentage total return, capital gains yield, and dividend yield. - HINT: Calculate capital gains yield and dividend yield first as you need those two components to calculate % total return. Capital Gains Yield = (End Price - Beg Price)/Beg Price = (185-150)/150 = 35/150 = .23 Dividend Yield = Dividends Paid/Beg Price = 2.5/150 = .02 % Total Return = Capital Gains Yield + Dividend Yield = .23+.02 = .25 #2 - TOTAL RETURN You bought a share of 8% preferred stock for $125 last year. The market price for your stock is now $190. What was your total return for last year? - HINT: Calculate dividends paid first as you need this component to calculate total return. Dividends Paid = Dividend Yield*Beg Price = .08*125 = 10 Total Return = (End Price - Beg Price + Div Paid)/Beg Price = (190-125+10)/125 = 75/125 = .60 #3 - CAPM Danica, Inc. has a beta of 1.75, the expected market rate of return is 20%, and a risk-free rate of 4 percent. What is the expected rate of return of the stock? HINT - Watch your order of operations. Expected Return = Risk Free Rate + (Beta*(Expected Market Rate-Risk Free Rate)) Expected Return = .04+[1.75*(.20-.04)] = .04+(1.75*.16) = .04+.28 = .32 #4 - WACC Danica, Inc. has a targeted capital structure of 60% common stock and 40% debt. The cost of equity is 18% and the cost of debt is 12%. The tax rate is 40%. What is the company's weighted average cost of capital (WACC)? HINT: Watch your order of operations. WACC = (% equity*cost of equity) + (% debt*cost of debt*(1-tax rate)) WACC = (.60*.18) + (.40*.12(1-.40) = .11 + (.40*.12*.60) = .11 + .03 = .14 #5 - FLOTATION COSTS Danica, Inc. has a debt-equity ratio of .55. The company is considering a new plant that will cost $1 million to build. When the company issues new equity, it incurs a flotation cost of 8%. The flotation cost on new debt is 2%. What is the initial cost of the plant if the company raises all equity externally? HINT: Calculate your flotation cost % first as you need this component to calculate your initial cost and watch your order of operations. Flotation Cost % = [Flotation Cost of Debt * DE Ratio/(1+DE Ratio)] + [Flotation Cost of Equity * 1/(1+DE Ratio)] Flotation Cost % = (.02*.55/(1+.55)) + (.08*1/(1+.55) Flotation Cost % = .02*.55/1.55 + .08*1/1.55 Flotation Cost % = .01 + .05 = .06 Initial Cost Based On Raising All Equity = Cost/(1-Flotation Cost %) Initial Cost Based On Raising All Equity = 1000000/(1-.06) = 1000000/.94 = 1063830 Rate of Return for Stocks and Bonds Grading Guide FIN/571 Version 9 Foundations of Corporate Finance Copyright Copyright © 2017, 2016, 2013 by University of Phoenix. All rights reserved. University of Phoenix® is a registered trademark of Apollo Group, Inc. in the United States and/or other countries. Microsoft®, Windows®, and Windows NT® are registered trademarks of Microsoft Corporation in the United States and/or other countries. All other company and product names are trademarks or registered trademarks of their respective companies. Use of these marks is not intended to imply endorsement, sponsorship, or affiliation. Edited in accordance with University of Phoenix® editorial standards and practices. Rate of Return for Stocks and Bonds Grading Guide FIN571 Version 9 Individual Assignment: Rate of Return for Stocks and Bonds Purpose of Assignment The purpose of this assignment is to allow the student an opportunity to calculate the rate of return of equity and debt instruments. It allows the student to understand the effects of dividends; capital gains; inflation rates; and how the nominal rate of return affects valuation and pricing. The assignment also allows the student to apply concepts related to CAPM, WACC and Flotation Costs to understand the influence of debt and equity on the company’s capital structure. Resources Required Corporate Finance Grading Guide Content Calculated the problems and provided an overall summary of how companies make financial decisions in no more than 700 words, based on the answers. Stock Valuation. A stock has an initial price of $100 per share, paid a dividend of $2.00 per share during the year, and had an ending share price of $125. Compute the percentage total return, capital gains yield, and dividend yield. Total Return. You bought a share of 4 percent preferred stock for $100 last year. The market price for your stock is now $120. What was your total return for last year? CAPM. A stock has a beta of 1.20 the expected market rate of return is 12% and a risk-free rate of 5 percent. What is the expected rate of return of the stock? WACC. The Corporation has a targeted capital structure of 80% common stock and 20% debt. The cost of equity is 12% and the cost of debt is 7%. The tax rate is 30%. What is the company’s weighted average cost of capital (WACC)? Flotation Costs. Medina Corp. has a debt– equity ratio of .75. The company is considering a new plant that will cost $125 million to build. When the company issues new equity, it incurs a flotation cost of 10 percent. The flotation cost on new debt is 4 percent. What is the initial cost of the plant if Met Partially Met Not Met Comments: 2 Rate of Return for Stocks and Bonds Grading Guide FIN571 Version 9 Content Met Partially Met Not Met Total Available Total Earned 85 #/85 Partially Met Not Met Total Available Total Earned 35 #/35 120 #/120 Comments: the company raises all equity externally? Writing Guidelines Met The paper—including tables and graphs, headings, title page, and reference page—is consistent with APA formatting guidelines and meets course-level requirements. Intellectual property is recognized with in-text citations and a reference page. Paragraph and sentence transitions are present, logical, and maintain the flow throughout the paper. Sentences are complete, clear, and concise. Rules of grammar and usage are followed including spelling and punctuation. Assignment Total Additional comments: # Comments: 3
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Rate of return
by Bm Kk

Submission date: 31-May-2019 10:23AM (UT C-0500)
Submission ID: 1138419137
File name: Rate_of _Return_f or_Stocks_and_Bonds.docx (21.38K)
Word count: 653
Character count: 3352

Rate of return
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Giulio Cifarelli, Giovanna Paladino. "Volatility
linkages across three major equity markets: A
financial arbitrage approach", Journal of
International Money and Finance, 2005

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Running head: RATE OF RETURN FOR STOCKS AND BONDS

Rate of Return for Stocks and Bonds

Name
Institution
Date

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RATE OF RETURN FOR STOCKS AND BONDS

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Introduction
In business finance, rate of return is defined as the net gain or the net loss on a given
investment over a given period of time. Usually, it is expressed as percentage of the initial cost
of the specific investment. In a...


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