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drek231 [11]
3 years ago
6

Shore Hotels just paid an annual dividend of $1.50 per share. The company will increase its dividend by 7 percent next year and

will then reduce its dividend growth rate by 2 percentage points per year until it reaches the industry average of 3 percent dividend growth, after which the company will keep a constant growth rate forever. What is the price of this stock today given a required return of 14 percent?
(A) $14.85
(B) $18.99
(C) $11.83
(D) $16.54
(E) $13.02
Business
1 answer:
kiruha [24]3 years ago
5 0

Answer:

(A) $14.85

Explanation:

Annual dividend just paid (D0)= $1.50

growth rate = 7% or 0.07 as a decimal

D1 ; next year's dividend = D0(1+g) = 1.50(1.07)= 1.605

growth rate = 7-2% = 5% or 0.05 as a decimal

D2; dividend yr2 = D1(1+g) = 1.605(1.05) = 1.6853

growth rate = 5-2% = 3% or 0.03 as a decimal

Terminal Cashflow; D3 = 1.6853 (1.03) = 1.7359

Next, find the present value of each dividend at 14%;

PV(D1) = 1.605/(1.14 ) = 1.4079

PV(D2) = 1.6853/(1.14² ) = 1.2968

PV of terminal Cashflow (D3 onwards) = \frac{\frac{1.7359}{0.14-0.03} }{1.14^{2} } = 12.1429

Next, sum up the PVs to find the price;

= 1.4079 + 1.2968 + 12.1429

= 14.848

Therefore the price of the stock today  is $14.85

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Answer:

Explanation:

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The following selected transactions were completed by Fasteners Inc. Co., a supplier of buttons and zippers for clothing:
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<u>Solution and Explanation:</u>

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1 Nov-21  Notes receivable                                      $ 72,000  

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2  Dec-31  Interest receivable (72000 * 9 \% * 40 / 360)    $720  

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3  Jan-20  Cash                                           $ 73080  

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 Notes receivable                                               $72,000

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Answer:

a. One spatial change in manufacturing employment patterns as a result of deindustrialization is production shift.

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d. Facilitating the construction of railroads, bridges, tall buildings, larger ships, and other infrastructure, Powering service-sector industries such as information technology, financial services, retail, and education, all of which depend on the processing power and connectivity brought about by the computer chip.

e. A growth pole is significant to an urban economy as it will attract supporting businesses such as retail establishments, restaurants, and other service industries to the city or urban area on a local scale.  

f. Post-fordism methods of production have transformed operation at individual factories by instead of workers working only one task all day and not being able to perform other tasks in the factory the workerscould now work multiple tasks and were not concealed to one specific area of work, this also made the workers more appealing to other factories and made it to where they could work other positions for more money and could not be so easily concealed for one spot.

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Turnbull Co. has a target capital structure of 58% debt, 6% preferred stock, and 36% common equity. It has a before-tax cost of
OLga [1]

Answer:

Turnbull’s weighted average cost of capital (WACC) will be higher by 0.64% if it has to raise additional common equity capital by issuing new common stock instead of raising the funds through retained earnings.

Explanation:

Note: This question is not complete. The complete question is therefore provided before answering the question as follows:

Turnbull Co. has a target capital structure of 58% debt, 6% preferred stock, and 36% common equity. It has a before-tax cost of debt of 8.2%, and its cost of preferred stock is 9.3%. If Turnbull can raise all of its equity capital from retained earnings, its cost of common equity will be 12.4%. However, if it is necessary to raise new common equity, it will carry a cost of 14.2%. If its current tax rate is 40%, how much higher will Turnbull’s weighted average cost of capital (WACC) be if it has to raise additional common equity capital by issuing new common stock instead of raising the funds through retained earnings? (Note: Round your intermediate calculations to two decimal places.)

The explanation to the answer is now given as follows:

Step 1: Calculation of WACC when all of its equity capital is raised from retained earnings

This can be calculated using WACC formula as follows:

WACCR = (WS * CE) + (WP * CP) + (WD * CD * (1 - T)) ………………… (1)

Where;

WACCR = Weighted average cost of capital when all of its equity capital is raised from retained earnings = ?

WS = Weight of common equity = 36%, or 0.36

WP = Weight of preferred stock = 6%, or 0.06

WD = Weight of debt = 58%, or 0.58

CE = Cost of equity = 12.4%, or 0.124

CP = Cost of preferred stock = 9.3%, 0.093

CD = Before-tax cost of debt = 8.2%, or 0.082

T = Tax rate = 40%, or 0.40

Substituting the values into equation (1), we have:

WACCR = (0.36 * 0.124) + (0.06 * 0.093) + (0.58 * 0.082 * (1 - 0.40))

WACCR = 0.078756, or 7.8756%

Rounding to 2 decimal places, we have:

WACCR = 7.88%

Step 2: Calculation of WACC if it raises new common equity

This can also be calculated using WACC formula as follows:

WACCE = (WS * CE) + (WP * CP) + (WD * CD * (1 - T)) ………………… (2)

Where;

WACCE = Weighted average cost of capital if it raises new common equity = ?

WS = Weight of common equity = 36%, or 0.36

WP = Weight of preferred stock = 6%, or 0.06

WD = Weight of debt = 58%, or 0.58

CE = Cost of equity = 14.2%, or 0.142 (Note: This is the only thing that has changed compared to what we have in Step 1 above.)

CP = Cost of preferred stock = 9.3%, 0.093

CD = Before-tax cost of debt = 8.2%, or 0.082

T = Tax rate = 40%, or 0.40

Substituting the values into equation (2), we have:

WACCE = (0.36 * 0.142) + (0.06 * 0.093) + (0.58 * 0.082 * (1 - 0.40))

WACCE = 0.085236, or 8.5236%

Rounding to 2 decimal places, we have:

WACCE = 8.52%

Step 3: Caculation of how much higher will Turnbull’s weighted average cost of capital (WACC) be if it has to raise additional common equity capital by issuing new common stock instead of raising the funds through retained earnings.

This can be calculated as follows:

Percentage by which WACC is higher = WACCE - WACCR

Percentage by which WACC is higher = 8.52% - 7.88%

Percentage by which WACC is higher = 0.64%

Therefore, Turnbull’s weighted average cost of capital (WACC) will be higher by 0.64% if it has to raise additional common equity capital by issuing new common stock instead of raising the funds through retained earnings.

5 0
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