fin week 11

Problem 11-1: Market price

Chapter 8

A firm has SAR 5,000 preferred stock that pays a dividend of 5%. What is the market price

for the stock if the required rate of return is 7%?

Problem 11-2: Market value

Chapter 8

PQR Corporation preferred stock is selling for SAR 2,000 per share and pays an annual

dividend of SAR 160 per share. If the investor requires a return of 7%, what is

the appropriate market value for the shares?

Problem 11-3: Stock value

Chapter 8

Dinosaur Corporation's common stock paid a dividend of SAR 360 last year and is expected

to grow indefinitely at a rate of 7%. If you can achieve a 10% return on equity, what is the

value of the stock?

Problem 11-4: Growth rate

Chapter 8

If a firm's return on equity is 17% and management plans to retain 40% of earnings for

investment purposes, what will be the firm's growth rate?

Problem 11-5: Rate of return

Chapter 8

STU Corporation paid a dividend of SAR 400 last year and the shares are selling for

SAR 10,000 per share. The dividend is expected to grow at 5% indefinitely. What

is the stock's expected rate of return?

Problem 11-6: Return on preferred stock

Chapter 9

Rodeo Corporation is planning to sell new preferred stock paying an 8% dividend on an

SAR 5,000 face value. Flotation costs will be 5% of the current market price of SAR 6,000

per share. What is the rate of return on the new preferred stock?

Problem 11-7: CAPM

Chapter 9

BB Corporation's stock has a beta of 1.2. The risk-free rate is 5% and the

expected return on the market is 13%. What is the required rate of return

on BB Corporation's stock using the Capital Asset Pricing Model (CAPM)?

Problem 11-8: WACC

Chapter 9

Alexander Corporation's balance sheet shows $400 million in debt, $80 million in preferred stock,

and $520 million in total common equity.

The firm's tax rate is:

40%

Rate on Debt (Rd)

5%

Rate on Preferred Stock (Rps)

6%

Rate on Common Stock (Rcs)

10%

If Alexander has a target capital structure of 40% debt, 10% preferred stock, and 50% common stock, what is its Weighed Average Cost of Capital (WACC)?