<p>#1 Warr Corporation just paid a dividend of $1.60 a share. The dividend is expected to grow 6% a year for the next 3 years and then at 5.5% a year thereafter. What is the expected dividend per share for each of the next 5 years? D0 = 1.60; g = 6% for 3 years and then 5.5% thereafter</p><p>D n+1 = D n (1 + g) D1 = 1.60 (1 + 0.06) = $1.696 D2 = 1.696 (1+0.06) = $1.798 D3 = 1.798 (1 + 0.06) = $1.902 D4 = 1.902 (1+0.055) = $2.007 D5 = 2.007 (1 + 0.055) = $2.117</p><p>#2 Harrison Clothier’s stock currently sells for $22 a share. It just paid a dividend of $1.00 per share. The dividend is expected to grow at a constant rate of 5% per year. What stock price is expected 1 year from now? What is the required rate of return? </p><p>P0=$22; D0 = $1.00; g = 5%; P1=?; rS=? P1= P0 (1+g) =$22(1+ 0.05) =$23.10 rS =D1/P0+g = [$1.00(1.05) / $20] +0.05 = [$1.05/$22 ] + 0.05 = 9.77%. rS = 9.77%</p><p>#3 Smith Technologies is expected to generate $140 million in free cash flow next year, and FCF is expected to grow at a constant rate of 6% per year indefinitely. Smith has no debt or preferred stock, and its WACC is 11%. If Smith has 50 million shares of stock outstanding, what is the stock’s value per share. (Question 3# Hint: To get the Firm Value you would take: Firm Value = FCF1/(WACC – g). Since this company is entirely funded by equity (no debt), then the Firm Value is equal to the Equity Value of the firm. So you would take your Firm Value (Equity Value) and divide that by the number of outstanding shares to get the Equity Value per share.) Firm Value = FCF1/(WACC – g) = 140/ (11% - 6%) = $2,800 million Value per share = Value of equity/ no. of shares outstanding = 2,800/ 50 = $56 per share</p><p>#4 What will be the nominal rate of return on a perpetual preferred stock with a $100 par value, a stated dividend of 7% of par, and a current market price of (a) $50, (b) $75, (c) $100, and (d) $125? Rate of return on preferred stock = Preferred dividend/ Sale price of preferred stock Preferred dividend = 100 x 7% = $7 (a) Rate of return = 7/50 = 0.14 or 14% (b) Rate of return = 7/75 = 0.0933 or 9.33% (c) Rate of return = 7/100 = 0.07 or 7% (d) Rate of return = 7/125 = 0.056 or 5.6%</p><p>#5 The Heuser Company’s currently outstanding bonds have a 10% coupon and a 11% yield to maturity. Heuser believes it could issue new bonds at par that would provide a similar yield to maturity. If its marginal tax rate is 40%, what is Heuser’s after-tax cost of debt? After-tax cost of debt = Cost of debt (1 – tax rate) = 11% (1 – 0.40) = 6.6%</p><p>#6 Percy Motors has a target capital structure of 40% debt and 60% common equity, with no preferred stock. The yield to maturity on the company’s outstanding bonds is 8.5%, and its tax rate is 35%. Percy’s CFO estimates that the company’s WACC is 9.41%. What is Percy’s cost of common equity? </p><p>9.41% = 0.4 x Re + 0.60 x 8.5% (1 – 0.40) Re = 15.875%</p>