Business Finance
Rate of Return for Stocks and Bonds

Question Description

Please note that this should be completed in APA format with proper citing in addition to a reference page. References should be creditable such as .gov, .edu, and/or selective .org websites.


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.

Assignment Steps

Resources: Corporate Finance

Calculate the following problems and provide an overall summary of how companies make financial decisions in no more than 700 words, based on your answers:

  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?

Final Answer

The calculations are presented in excel file. In case it will deem necessary to put then in the word file, please inform me.

Question 1

Question 2

Question 3

Stock valuation
Initial price
Dividends
Ending price
Computation
Percentage total return
Capital gains yield
Dividend yield
Toal return
4% preferred stock
Market price
Computation
Toal return
CAPM
Stock beta
Expected market rate of return
Risk free rate
Calculation
Expected rate of return

Question 4
$100 per share
$2 per share
$125 Per share
27,00%
25,00%
1,60%
Question 5
$100 last year
$120
$4

1,2
12%
5%
13,40%

WACC
Turgeted capital stracture of common stock
Turgeted capital stracture of debt
Cost of equity
Cost of debt
Tax rate
Computation
WACC
Floatation costs
Debt-Equity ratio
New plant cost
Floatation cost for equity
Floatation cost on new debt
Calculation
Cost of the new plant if equity is raised externally

80%
20...

University of Maryland

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