Rate of Return for Stocks and Bonds

User Generated

cnhynsberzna

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.

Click the Assignment Files tab to submit your assignment.

Materials

User generated content is uploaded by users for the purposes of learning and should be used following Studypool's honor code & terms of service.

Explanation & Answer

Attached.

Stocks, Bonds and Organizations Financial Decision Making
Bonds and Stocks are essential tools used by organizations in the desire of arising capital to
finance various operation as well as programs.
I.

Organizations Financial Decision Making


Question one
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
$125. Compute the percentage total return, capital gains yield, and dividend yield.

Initial price
Dividend paid
Ending stock

$
$
$

100,00
2,00
125,00

Percentage Total Return=(Ending stock-initial stock)+divinded)/initial stock
Percentage total return

27,00%

Capital Gain yield= Ending price-initial price/ initial price
Capital Gain yield

25,00%

Dividend Yield= annual dividend / current stock price
Dividend Yield

1,60%

Question two
Total Return: You bought a share of 4% preferred stock for $100 last year. The market price for your stock is now $120. What
total return for last year?
Since a preferred stock assumes a par value of 100, then price of the stcock wa 4 dollars
Total return= current price-initial price+ dividend/initial price
price last year
$
100,00
current price
$
120,00
Dividend
$
4,00
Total return

0,24

24,0%

Question three
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 exp
rate of return of the stock?
Beta
Rm
Rf

1,2
12%
5%

Expected rate of return of a stock= Risk free rate+B...


Anonymous
Just what I needed…Fantastic!

Studypool
4.7
Trustpilot
4.5
Sitejabber
4.4

Similar Content

Related Tags