introduction to business

introduction to business

Problems:

1. Louis Incorporated expects non-normal dividend growth over the next three years; that is a 10% growth rate in the first year, then 20%, and then 25% followed by growth of 5% thereafter. If the last dividend paid was $0.25 and the appropriate discount rate is 12%; what is the price of the stock today?

2. You have been hired as a consultant by Feludi Inc.’s CFO, who wants you to help her estimate the cost of capital. You have been provided with the following data: rRF = 4.10%; RPM = 5.25%; and b = 1.30. Based on the CAPM approach, what is the cost of common from retained earnings?

3. You have the choice between investing in a corporate bond or a municipal bond with a yield of 8%. If your marginal tax rate is 28%, what should be the yield on the corporate bond in order to be competitive?

4. Louis Bonds have 14 years to maturity, with a coupon rate of 8%, paid ANNUALLY; if the appropriate discount rate is 12% what is the CURRENT yield of Louis Bonds?

5. Frank sold 100 put options contracts to Claire on APPL with exercise price of $150 and premium of $12 per share. When the price of APPL is $170, will Frank exercise his options? If yes, calculate Frank’s profit. If not, calculate Claire’s profit.

Solution Preview

Problems:                                                                              

1. Louis Incorporated expects non-normal dividend growth over the next three years; that is a 10% growth rate in the first year, then 20%, and then 25% followed by growth of 5% thereafter.  If the last dividend paid was $0.25 and the appropriate discount rate is 12%; what is the price of the stock today?

D0 = 0.25

D1= (0.25 x 1.1) = 0.275

D3 = (0.275x 1.2) = 0.33

(306 words)