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Chapter 4: Q3DQ (page 319)
What are the three factors that influence the required rate of return by investors?
Three factors affecting the required rate of return are 鈥� the real rate of return, inflation premium, and risk premium.
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Murray Motor Company wants you to calculate its cost of common stock. During the next 12 months, the company expects to pay dividends (D1) of \(2.50 per share, and the current price of its common stock is \)50 per share. The expected growth rate is 8 percent.
a. Compute the cost of retained earnings (Ke). Use Formula 11-5.
b. If a $3 flotation cost is involved, compute the cost of new common stock (Kn). Use Formula 11-6.
Question: Determine the amount of money in a savings account at the end of 10 years, given an initial deposit of $5,500 and a 12 percent annual interest rate when interest is compounded (a) annually, (b) semiannually, and (c) quarterly.
Kilgore Natural Gas has a $1,000 par value bond outstanding that pays 9 percent annual interest. The current yield to maturity on such bonds in the market is 12 percent. Compute the price of the bonds for these maturity dates:
a. 30 years.
b. 15 years.
c. 1 year.
Assume a \(250,000 investment and the following cash flows for two products:
Year | Product X | Product Y |
1 | \)90,000 | $50,000 |
2 | 90,000 | 80,000 |
3 | 60,000 | 60,000 |
4 | 20,000 | 70,000 |
Which alternatives would you select under the payback method?
The treasurer of Riley Coal Co. is asked to compute the cost of fixed income securities for her corporation. Even before making the calculations, she assumes the aftertax cost of debt is at least 3 percent less than that for preferred stock. Based on the following facts, is she correct?
Debt can be issued at a yield of 11.0 percent, and the corporate tax rate is 20 percent. Preferred stock will be priced at \(60 and pay a dividend of \)6.40. The flotation cost on the preferred stock is $6.
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