College Essays-calculate the rate of return of equity and debt instruments

College Essays-calculate the rate of return of equity and debt instruments

The purpose of this assignment is to allow the student an opportunity to calculate the rate of return of equity and debt instruments. It allows the student to understand the effects of dividends; capital gains; inflation rates; and how the nominal rate of return affects valuation and pricing. The assignment also allows the student to apply concepts related to CAPM, WACC, and Flotation Costs to understand the influence of debt and equity on the company’s capital structure.

Assignment Steps

Resources: Corporate Finance

Calculate the following problems using Excel or a Word document:

Stock      Valuation: A stock has an initial price of $100 per share, paid a      dividend of $2.00 per share during the year, and had an ending share price      of $125. Compute the percentage total return, capital gains yield, and      dividend yield.

Total      Return: You bought a share of 4% preferred stock for $100 last year.      The market price for your stock is now $120. What was your total return      for last year?

CAPM: A      stock has a beta of 1.20, the expected market rate of return is 12%, and a      risk-free rate of 5 percent. What is the expected rate of return of the      stock?

WACC: The      Corporation has a targeted capital structure of 80% common stock and 20%      debt. The cost of equity is 12% and the cost of debt is 7%. The tax rate      is 30%. What is the company’s weighted average cost of capital (WACC)?

Flotation      Costs: Medina Corp. has a debt-equity ratio of .75. The company is      considering a new plant that will cost $125 million to build. When the      company issues new equity, it incurs a flotation cost of 10%. The      flotation cost on new debt is 4%. What is the initial cost of the plant if      the company raises all equity externally?