Question # 1
Current investigation has gathered the following financial data from ABC Company. You are required to calculate the following:
Bond: Calculate the value of a Rs. 5,000 (par value) bond paying interest at an annual coupon interest rate of 10% with 10 years maturity and the required return on similar‐risk bonds is currently a 12% annual rate paid annually.
Common stock: Company has recently paid annual dividend of Rs.1.50 per common share this year. The Company expects earnings and dividends to grow at a rate of 7% per year for the anticipated future. What required rate of return for this stock would result in a price per share of Rs. 32?
Question # 2
Using the basic equation of capital asset pricing model (CAPM), solve followings for the unknown.
1. Find the risk free rate of return with a required rate of return of 18% and a beta of 1.50 when the market return is 16%.
2. Find the beta for a stock with a required rate of return of 15% when the risk free rate of return and market risk premium are 10% and 2.5% respectively.
Solution:
Question No. 1
Cost of equity = [9 / (80-5)] + .05 = 0.17
Cost of preferred stock = 9/90 = .10
WACC = rD XD. (1-Tax) + rP XP + rE XE .
WACC = .30 x .13 (1-.35) + .30 x .10 + .40 x 0.17
WACC = 0.02535 + .03 + 0.068
WACC = 0.12335
WACC = 12.335
Question No. 2
Break even point in units = Fixed expenses / Unit contribution margin
Break even point in units Firm A = 24600 / (16-6.75) = 2660
Break even point in units Firm B =30600 / (20-9.75) = 2985
Current investigation has gathered the following financial data from ABC Company. You are required to calculate the following:
Bond: Calculate the value of a Rs. 5,000 (par value) bond paying interest at an annual coupon interest rate of 10% with 10 years maturity and the required return on similar‐risk bonds is currently a 12% annual rate paid annually.
Common stock: Company has recently paid annual dividend of Rs.1.50 per common share this year. The Company expects earnings and dividends to grow at a rate of 7% per year for the anticipated future. What required rate of return for this stock would result in a price per share of Rs. 32?
Question # 2
Using the basic equation of capital asset pricing model (CAPM), solve followings for the unknown.
1. Find the risk free rate of return with a required rate of return of 18% and a beta of 1.50 when the market return is 16%.
2. Find the beta for a stock with a required rate of return of 15% when the risk free rate of return and market risk premium are 10% and 2.5% respectively.
Solution:
Question No. 1
Cost of equity = [9 / (80-5)] + .05 = 0.17
Cost of preferred stock = 9/90 = .10
WACC = rD XD. (1-Tax) + rP XP + rE XE .
WACC = .30 x .13 (1-.35) + .30 x .10 + .40 x 0.17
WACC = 0.02535 + .03 + 0.068
WACC = 0.12335
WACC = 12.335
Question No. 2
Break even point in units = Fixed expenses / Unit contribution margin
Break even point in units Firm A = 24600 / (16-6.75) = 2660
Break even point in units Firm B =30600 / (20-9.75) = 2985
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