Assignment
Question 1: A company wants to determine its cost of capital. The company cansell a 12%, 10 year semiannual bond (with $1,000 par value) for $1,030. Also, the company can sell new common stock at $20 per share with a flotation cost of $2 per share. Its recent dividend was $1.80 and its constant growth rate is 5%. The company finances its capital by 40% debt, 10% common stock, and 50% retained earnings. If the company's tax rate is 40%, what is its cost of capital?
What is the cost of debt?(The cost of debt is the YTM on the existing debt.)
Question 2: You buy today a stock at $50 per share. This stock will pay you a $4 dividend per share for the next 4 years. At the end of four years (immediately after the fourth dividend payment), you will sell your stock at $60 per share. What annual rate of return will you earn?
Question 3: Three years ago, you bought a 12% bond that had 7 years to maturity and a yield to maturity of 12%. Today (after the sixth interest payment), you sold the bond when it is yielding 15%. What is your annual rate of return for the three year period? All coupon payments are semi-annual, and the par value is $1,000.
Question 4: Ink Inc. expects to have net income of $100,000 next year. Ink's optimal capital structure is 30% debt and 70% equity. Ink's planned capital budget for next year is expected to be $130,000. If Ink uses the residual dividend policy to determine next year's dividend payout, how much will Ink pay out next year?