Question

1, Chipotle's last dividend was $1.00 per share, and the dividend is expected to grow at...

1, Chipotle's last dividend was $1.00 per share, and the dividend is expected to grow at 10 percent indefinitely. The stock currently sells for $55 per share. What is Chipotle's cost of equity capital?

3, IBM Corporation has a preferred stock outstanding priced at $150 per share. If investors demand a 10 percent return on investments such as this, what is the annual dividend on the preferred stock?

2, 3M Corporation has a cost of equity of 12 percent and a pre-tax cost of debt of 8 percent. The firm's tax rate is 25 percent. Calculate 3M's weighted-average cost of capital (WACC) if the firm has a target debt-equity ratio of 50 percent.

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

Part 1:

Ke = [ D1 / P0 ] + g

P0 - Price Today

D1 - Expected Div after 1 Year

D0 - Just paid div

g - Growth rate

D1 = D0 ( 1+g )

= $ 1 ( 1 + 0.10 )

= $ 1 * 1.1

= $ 1.1

Ke = [ D1 / P0 ] + g

= [ 1.1 / 55 ] +0.10

= 0.02 + 0.10

= 0.12 i.e 12%

Part 2:

WACC = [ We * Ke ] + [ Wd * Kd ]

We - weight in Equity

Ke - Cost of equity

Wd - Weight in debt

Kd - COst of debt after Tax

Kd = Cost of Debt ( 1 - Tax Rate )

= 8% ( 1 - 0.25 )

= 8% * 0.75

= 6%

Source Weight Cost Wtd Cost
Equity 0.5 12% 6.00%
Debt 0.5 6% 3.00%
WACC 9.00%

Part 3:

Annual Div = Price * Rquired Rate

= $ 150 * 10%

= $ 15

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
McKinsey and Sons has a target capital structure that calls for 50% debt, 10% preferred stock,...
McKinsey and Sons has a target capital structure that calls for 50% debt, 10% preferred stock, and 40% common equity. The firm can issue new 10 year debt with an annual coupon of 9% for $968.606. The firm is in a 35% tax bracket. The firm's preferred stock sells for $80 per share and pays a dividend of $10 per share; however, the firm will only net $77 per share on the sale of new preferred stock. The firm's common...
Cavernbridge stock trades for $33 per share. It is expected to pay a $2.5 dividend at...
Cavernbridge stock trades for $33 per share. It is expected to pay a $2.5 dividend at year end,and the dividend is expected to grow at a constant rate of 3.3% a year. The before-tax cost of debt is 5.1%, and the tax rate is 30%. The target capital structure consists of 40% debt and 60% common equity. What is the Cavernbridge's WACC (in percent) if all the equity used is from reinvested earnings?
5. Moorhead industries’ common stock is currently trading at $80 a share. The stock is expected...
5. Moorhead industries’ common stock is currently trading at $80 a share. The stock is expected to pay a dividend of $4/share at the end of the year and the dividend is expected to grow at a constant rate of 6% a year. What is the cost of common equity? 6. Moorhead industries’ has a target capital structure of 35 percent debt, 20 percent preferred stock, and 45 percent common equity. It has a before-tax cost of debt of 8%,...
Go Glass Berhad has a target capital structure that calls for 40 percent debt, 10 percent...
Go Glass Berhad has a target capital structure that calls for 40 percent debt, 10 percent preferred stock and 50 percent common equity. The firm's current after-tax cost of debt is 6 percent and it can sell as much debt as it wishes at this rate. The firm's preferred stock currently sells for RM9 a share and pays a dividend of RM1 per share; however, the firm will net only RM 8 per share from the sale of new preferred...
Growth​ Company's current share price is $20.15 and it is expected to pay a $1.30 dividend...
Growth​ Company's current share price is $20.15 and it is expected to pay a $1.30 dividend per share next year. After​ that, the​ firm's dividends are expected to grow at a rate of 4.1% per year. a. What is an estimate of Growth​ Company's cost of​ equity? b. Growth Company also has preferred stock outstanding that pays a $2.15 per share fixed dividend. If this stock is currently priced at $28.20​, what is Growth​ Company's cost of preferred​ stock? c....
The BHP Corporation has debt with a market value of $55 million, preferred stock worth $3...
The BHP Corporation has debt with a market value of $55 million, preferred stock worth $3 million outstanding, and common equity with a market value of $42 million. The company’s debt yields 9.5 percent. Its preferred stock pays $6.5 per share fixed dividend and is currently priced at $50 per share. The company’s common stock has a beta of 0.90, the risk-free rate is 4 percent and the market risk premium is 8 percent. Given that BHP Corporation faces 30...
Mackenzie Company’s current share price is $20 and it is expected to pay a $1 dividend...
Mackenzie Company’s current share price is $20 and it is expected to pay a $1 dividend per share next year. After that, the firm’s dividends are expected to grow at a rate of 4% per year. Mackenzie has some debt outstanding with a yield to maturity of 7%. What is an estimate of Mackenzie’s cost of equity? Mackenzie also has preferred stock outstanding that pays a $2 per share fixed dividend. If this stock is currently priced at $25, what...
Hiland's optimal or target capital structure has the following weights: Debt 35%, Preferred Stock 15%, and...
Hiland's optimal or target capital structure has the following weights: Debt 35%, Preferred Stock 15%, and Common Stock 50%. The before tax cost of debt (or yield to maturity) is 7%. The firm's marginal tax rate is 40%. The firm has retained earnings as its primary source of common equity funding and has not incurred flotation costs. Its preferred stock if currently selling for $40 and pays a perpetual dividend of $4.00 per share. The firm is expected to grow...
A. Summerdahl Resort's common stock is currently trading at $39 a share. The stock is expected...
A. Summerdahl Resort's common stock is currently trading at $39 a share. The stock is expected to pay a dividend of $1.00 a share at the end of the year (D1 = $1.00), and the dividend is expected to grow at a constant rate of 7% a year. What is the cost of common equity? Round your answer to two decimal places. B. Shi Import-Export's balance sheet shows $300 million in debt, $50 million in preferred stock, and $250 million...
Medical Group Inc is a large for-profit practice. Their last dividend was $2.5 per share and...
Medical Group Inc is a large for-profit practice. Their last dividend was $2.5 per share and their current stock price is $25. The dividend is expected to grow at 7% and the company has a beta coefficient of 1.5. Assume the required market return is 13% and the risk free rate is 8%. A) Calculate the cost-of-equity estimate according to the DCF Method. B) Calculate the cost-of-equity estimate according to the CAPM Mehtod. C) Based on the calculations above, what...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT