Rate of Return for Stocks and Bonds- Corporate Finance

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Corporate Finance FIN/571


Calculate the following problems in excel and provide an overall summary of how companies make financial decisions in no more than 700 words, based on your 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% 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%. The flotation cost on new debt is 4%. What is the initial cost of the plant if the company raises all equity externally?

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    Explanation & Answer

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    Running head: STOCKS AND BONDS


    Stocks and Bonds


    There are various ways on how the company must have to develop a good and effective
    financing decision under their management. The administrators and entrepreneurs have to weigh
    money associated contemplations with every tremendous preference they make for his or her
    firm. No matter whether the choice consists of capital extension, helping resources or acquiring
    giant hardware or converging with another firm, the sturdy economic investigation will provide
    the affirmation that the decision is made with the high-quality statistics handy. There are
    essential categories, which affects how businesses formulate their financial decisions:
    alternatives; contributing decisions, and corporate administration. Understanding the flotation
    cost tells a company how a great deal capital may be raised by means of new capital from new
    issues. CAPM: enables economic professionals to make the feel of the task risk and the everyday
    price of return that they must make a contribution (Sigman, 2005). Ascertaining a mixture return
    can tell an economic exper...

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