YOURlecturer_Capital History and WACC question
Part 1 - Capital Market History
If you 100 shares of stock for $4439 and in a year, you sell the shares for $49.67 per share, what is your capital gain (dollar amount) and your capital gain percentage? $528; 11.89%
2. If you received dividends of $165 during the year, what was your dividend yield? What was your total return for the year? 3.72%; 15.61%
Consider a series of returns for a 10 year period:
| Year | Return |
| 3.5% | |
| 13.3% | |
| -2.7% | |
| -23.5% | |
| 13.9% | |
| 24.3% | |
| 8.7% | |
| 2.1% | |
| 33.2% | |
| 10 | -8.9% |
3. What is the average rate of return? 6.39%
4. What is the standard deviation of returns? 16.28%
5. What is the holding period return for the 10 years? (Hint: If you started with $100, how much would you end up with after 10 years?) 66.42% (you’d end up with $166.42)
6. What is the geometric average rate of return? 5.23%
Consider a stock with the following information on a per share amount:
| Year | Price | Dividend | Cap Gain | Div |
| 0 (Initial Purchase) | 33.95 | n/a |
|
|
| 1 (first year of holding stock) | 34.25 | 1.01 | 0.88% | 2.97% |
| 33.06 | 1.04 | -3.47% | 3.04% | |
| 36.19 | 1.08 | 9.47% | 3.27% | |
| 37.22 | 1.13 | 2.85% | 3.12% | |
| 35.25 | 1.20 | -5.29% | 3.22% | |
| 39.97 | 1.28 | 13.39% | 3.63% |
7. What are the capital gains, dividend yields and total returns for each of the 6 years that you hold the stock? The total returns are just the sum of Cap Gain Yld and Div Yld
8. What is the average rate of return? 6.18%
9. What is the geometric average rate of return? 5.96%
Part Two - WACC Calculations
Summerdahl’s common stock is currently trading at $36 per share. The stock is expected to pay a dividend of $3.00 per share at the end of the year and the dividend is expected to grow at a constant rate of 5% per year. What is the cost of common equity? 13.33%
BooBoo Bookstores has a beta of 0.8. The yield on a 3-month T-Bill is 1.1% and the market risk premium is 6.6%. What is the estimated cost of equity using CAPM? 6.38%
A company’s 6% coupon rate, semiannual payment, $1000 par value bond that matures in 20 years sells for $545. The company’s marginal tax rate (state plus federal) is 35%. What is the firm’s after-tax cost of debt for the purposes of calculating WACC. 7.85%
An analyst has collected the following information regarding Christopher Co.:
The company’s capital structure is 50% common equity, 10% preferred equity and 40% debt.
The yield to maturity on the company’s bonds is 9 percent.
The company’s year-end dividend on common stock is forecasted to be $0.80 a share.
The company expects that its dividend will grow at a constant rate of 9 percent a year.
The company’s stock price is $25.
The company’s preferred stock is priced at $20 and has a dividend of $2.20 per share.
The company’s tax rate is 40 percent.
The company anticipates that it will need to raise new common stock and preferred stock this year. Its investment bankers anticipate that the total flotation cost will equal 5 percent of the amount issued. Assume the company accounts for flotation costs by adjusting the cost of capital. Given this information, calculate the company’s WACC. 9.36%
