Question

the tallman tractor company's eps in 2011 was $3. eps in 2006 was $2.1612. the company pays out40% of its earning as dividend and the stock currently selling for $21.6. the company expects earnings of $10 million in 2012. its optimal marginal value debts/assets ratio is 60% and the firm has no preferred stock outstanding.

a. Calculate the firm's growth rate in earnings

b. what is the firm;s cost of Retained Earning?

c Suppose Tallman Tractor yield to maturity is %, what is WACC of the firm?

d. what amount of Retained Earnings is expected in 2012?

e. At what amount of total financing will the firm's cost of equity increase?

f. the sale o f new stock would net the comany $18.36 per year. What is the firm's cost of new equity?

g. calculate the WACC according to condition g, yield to maturity is 9%

Answer 1

Calculation of Growth Rate
Return on Equity	=	EPS	*100
		Current Price
	=	3$	*100
		21.6$
	=	13.89%
Growth Rate	=	ROE * (1-D/P)
	=	13.89% * (1-0.4)
	=	8.33%
Answer to b:
Calculation of Cost of Retained Earnings
Cost of Retained Earnings	=	D1/P0 + g
	=	((3$*40%)+8.33%)/21.60$ + 8.33%
	=	14.27%
Answer to d:
Amount of Retained Earnings	=	10$ Million * 60%
	=	6$ Million