PRINCIPL OF FINANCE
PRINCIPL OF FINANCE FIN 301
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This 4 page Class Notes was uploaded by Mrs. Matilde Howe on Saturday September 26, 2015. The Class Notes belongs to FIN 301 at Iowa State University taught by Robert Porter in Fall. Since its upload, it has received 26 views. For similar materials see /class/214416/fin-301-iowa-state-university in Finance at Iowa State University.
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Date Created: 09/26/15
FIN 301 Porter 41509 Terms After Tax cost of Debt Corporate Valuation Model Market Equilibrium WACC Preferred Stock 1 agri iiilm ium is the state of the market where there is no advantage to sell or buy stock the market is just stable 2 i is found by taking a firms interest rate on new debt times the quantity one minus the marginal tax rate This is also used to find WACC 3 iii is a model used to determine the value of a firm by 4 5 lr combines the fixed dividend payments of a bond with aspects of a common stock Equations 6 Pt Dt1r7g 7 DD01gt 8 WACC wdrd1 T wprp wcrs w Weights Must sum to 1 rd Before tax cost of debt rd1 T After tax cost of debt rp Cost of preferred stock rS cost of equity raised by retained earnings FIN 301 Porter 41509 Problems 9 A 65 cent dividend was just paid on a stock with expected returns of 16 and expected growth of 8 What will the price ofthis stock be in year 5 D065 g8 rl6 135 PtDt1I 7g P5D51 7g PsDo1g6 meg P5 E65 E10296 16 08 10 The SampP 500 is currently returning 7 30day Tbills are returning 35 and you found the following information on stock BPS What is the current price of the stock Beta 9 Expected Growth 4 I Expected DiVidend price I 130 I rRF35 I M7 b9 D1 130 g4 mamareg P0 D1 1 7 g P0 130r 04 To finish solVing for the current stock price you have to find r using the CAPM r rRF brM imp r 035 907035 r 0665 or 665 gt Plug this into the P0 equation P0 1300665 04 FIN 301 Porter 41509 11 A preferred stock is selling for 120 and just paid a dividend of 350 What is the stock s growth rate What is the stock s expected return g on preferred stock is zero so rpDP r 350120 12 Corporation Yeep just paid a dividend of 175 per share and investors expect the dividend payments to grow rapidly at 30 for the next three years and beginning in year 3 grow at a constant rate of 5 thereafter and have an expect return 13 What will the value of the stock be at the end of year 3 What is the value of this stock today 13 Company CY has a 35 tax rate and is currently selling semiannual 10year bonds for 935 with a coupon rate of 75 What is the company s after tax cost ofdebt N 7 10 2 IY 7 PV 7 935 PMT 7 752 375 FV 1000 IY 42384 semiannually so 42384 2 13 AfterTax rd Before Tax rd 1 T AfterTax rd 8 4769 1 35 FIN 301 Porter 41509 14 Bear Ltd is expectedto have FCF of 5 million this year period 1 30 million next year and then have constant FCF of 9 Their WACC is currently 11 What is the value of the rm today
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