Rate of Return for Stocks and Bonds

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Zvynabr

Business Finance

Description

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?

Submit your summary and all calcluations.

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Explanation & Answer

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Running head: RATE OF RETURN FOR STOCK AND BONDS

Rate of Return for Stock and Bonds
Name
University of Phoenix
FIN/571
Dec 17, 2017

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RATE OF RETURN FOR STOCK AND BONDS

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Numerical Problem
Q1.
Intial price of the share,S1 = $100
Dividend per share,D = $2
Ending Share price,S2 = $125
a)Percentage of total return = (S2-S1+D)/S1 = ($125-$100+$2)/$100 = 27%
b)Capital Gain yield = (S2-S1)/S1 = ($125-$100)/$100 =25%
c) Dividend Yield = D/S1 =$2/$100 =2%
Q2.
Share price initial,S1 =$100
Preferred stock =4%
Market price of the share,S2 =$120
Dividend per share,D = 4% of $100 =$4
Total Return = (S2-S1+D)/S1 = ($120-$100+$4)/$100 = 24%
Q3.
Beta of the stock ,β =1.2
Expected Market return = 12%
Risk-free rate = 5%
Expected return of the stock, r = Risk free rate+beta(Expected market return-Risk free rate) =
0.05+1.2(0.12-0.05) = 0.134 =13.4%
Q4.
Targeted capital structure =80% of common stock
Debt percentage =20%
Cost of equity =12%
Cost of debt = 7%

RATE OF RETURN FOR STOCK AND BONDS

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Tax rat...


Anonymous
Awesome! Perfect study aid.

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