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:
- 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?
Submit your summary and all calcluations.
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Explanation & Answer
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Running head: RATE OF RETURN FOR STOCKS AND BONDS
Rate of Return for Stocks and Bonds
Student’s Name
Institutional Affiliation
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RATE OF RETURN FOR STOCKS AND BONDS
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Rate of Return for Stocks and Bonds
Stocks and bond are financial instruments used by enterprises in the course of raising
capital to fund diverse organizational processes, for instance, in a process of expanding of an
enterprise and corporate operations. Bodie, Kane, and Marcus postulate that a stock is a capital
raised by a business through shares subscriptions and issues, sold to willing buyers, such as the
public, corporate or the organizational investors (2014). Besides, a bond is a debt investment by
an institution, which borrows funds from the investors with a fixed or varying interest rate for a
specific period. Institutions utilize bonds and stocks to raise capital essential to finance various
enterprise operations and development programs.
Organizations Financial Decision Making
In an organization, financial decisions are made in a chain of command that involves the
management and the finance personnel. This assist in integrating expertise in evaluating the
implication of a financial decision to the enterprise as well as to the clients, for instance, in the
process of engaging in bonds and stocks in raising capital. Often, the finance officers assess the
expected rate from an investment, which involves stock valuation, total returns, capital asset
pricing, and the weighted average cost of capital. This heightens the optimi...
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