1. Assume the Blarrin Corp. just recently reported Free Cash Flow (FCF) of $23.7 million, and the FCF is expected to grow at a rate of 5.5% for the indefinite future. They have $40 million in preferred stock, $25 million in short-term investments and $90 million in long-term debt. There are 5 million shares of common stock outstanding, andf their WACC is 10.4%. Estimate the price per share of Blarrin stock using this information.
2. The McGonigall Company has just recently paid a dividend of $2.50 per share. Their dividends have been growing at a rate of 5% over the last several decades, and will most likely continue at that rate for the foreseeable future. Their stock is currently selling for $40.00 per share. If McGonigall were to issue new stock, they would incur flotation costs of 8%. What are the costs of internal equity and external equity for McGonigall?
3. If the McGonigall company (from #4 above) has bonds with a 20-year maturity and a 6% coupon rate that are selling at a price of $920 (assume a $1,000 par value) what would be the before-tax cost of debt for the company. Also what would be the cost of equity using the bond-yield-plus-risk-premium approach if we assume that McGonigall is at the lower end of the risk premium range? How does this method of calculating the cost of equity compare with what you found in #4 above, and which estimate would you prefer to use and why?
4. If the McGonigall Corp. (again, from above) has 3 million shares of common stock outstanding, 40,000 bonds outstanding, and 400,000 shares of preferred stock which currently sells for $25 per share (selling new shares would incur flotation costs of 6%) and pays a dividend of $2.90, what is its weighted average cost of capital (WACC) if the firm has a 40% marginal tax rate? Use the information in questions #4 and #5 to help you in this calculation, and assume that they use the cost of internal equity as calculated in #4.
Also, what would be McGonigall's weighted average cost of capital if they used external equity instead?
5. A 25-year bond ($1,000 par value) with semi-annual coupons is selling for $1,100, and the coupon rate is 5.8%. The bond can be called in 8 years for a call price of $1,058. What are the current yield, yield to maturity and yield to call for this bond? If you were to buy this bond today, discuss which of the above three yields you think would best measure the actual rate of return for this investment, given that you plan to own it until it matures. Explain. Also, what would be the capital gains yield on this bond in the first year of ownership if interest rates remain the same for the first year of ownership?