1. You want to find the expected return of a stock. The stock had returns of 12 percent, -23 percent, -5 percent, 16 percent, and 30 percent over the past five years. During this time period, the stock had a correlation coefficient with its industry of 0.59 and a correlation coefficient with the market of 0.82.
The standard deviation of the industry was 27%, and the standard deviation of the market was 12%. The risk-free rate is 3.50% and the market risk premium is 6.50%. What is the expected return of the stock?
2. You want to estimate the cost of a firm's hybrid security. The security was issued three years ago at $40/security. The price is currently $42/security. It pays a semiannual dividend of $2.00/security. The company has the one-time option to pay a super dividend of $45/security in 5 years, which would cause the securities to expire (essentially, a buyback option).
Your research indicates that the company will exercise this option with a probability of 60%. What is the annualized cost of this firm's hybrid security capital?
3. You estimate that the free cash flows of a firm will be $2million, $10million, $18million and $20million over the next four years. You estimate that the cash flows will grow at 4% thereafter. You have calculated the cost of equity capital = 15.5% and the pre-tax cost of debt capital = 7%.
The average tax rate is 20%, and the marginal tax rate is 40%. The firm is currently operating with a D/E ratio of 1.0, and the target D/E ratio is 0.30. Calculate the value of the firm.
4. You are evaluating a software package that will streamline the collection of your accounts receivable. The software will cost $3 million, and you plan to depreciate this cost over a 3-year, straight-line horizon. You do not anticipate additional capital spending, and because the software is unique to your firm, it will not be sold.
The firm's marginal tax rate is 30%, and its WACC is 15%. Further, the effects of this software package are expected to continue into perpetuity, and you project a terminal period revenue growth of 5%. Assume that all other operating expenses, net working capital accounts (except for A/R) and capex remain the same.
Revenue and Days Receivables Outstanding projections are shown below. As seen, the software should allow your firm to collect its receivables sooner than it would under the baseline projections. What is the NPV of this project?