(See attached file for full problem description)

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Problem 6-3

Preferred Stock. Preferred Products has issued preferred stock with an $8 annual dividend that

will be paid in perpetuity.

a. If the discount rate is 12 percent, at what price should the preferred sell?

b. At what price should the stock sell 1 year from now?

c. What is the dividend yield

capital gains yield

expected rate of return

of the stock?

Problem 6-10

Stock Values. Integrated Potato Chips paid a $1 per share dividend yesterday. You expect the

dividend to grow steadily at a rate of 4 percent per year.

a. What is the expected dividend in each of the next 3 years?

b. If the discount rate for the stock is 12 percent, at what price will the stock sell?

c. What is the expected stock price 3 years from now?

d. If you buy the stock and plan to hold it for 3 years, what payments will you receive?

What is the present value of those payments? Compare your answer to (b).

PMT YR1

PMT YR2

PMT YR3

PV of PMTs

Problem 6-19

Constant-Growth Model. Here are dataon two stocks, both of which have discount rates of 15%:

Stock A Stock B

Return on equity 15% 10%

Earnings per share $2.00 $1.50

Dividends per share $1.00 $1.00

Stock A Stock B

a. What are the dividend payout ratios for each firm?

b. What are the expected dividend growth rates for each firm?

c. What is the proper stock price for each firm?

Problem 12-5

Calculating WACC. Reactive Industries has the following capital structure. Its corporate tax rate is 35 percent. What is its WACC?

Security Market Value Required Rate of Return

Debt $20,000,000 6.00%

Preferred stock $10,000,000 8.00%

Common stock $50,000,000 12.00%

WACC FORMULA

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(See attached file for full problem description)

—

Problem 6-3

Preferred Stock. Preferred Products has issued preferred stock with an $8 annual dividend that

will be paid in perpetuity.

a. If the discount rate is 12 percent, at what price should the preferred sell?

b. At what price should the stock sell 1 year from now?

c. What is the dividend yield

capital gains yield

expected rate of return

of the stock?

Problem …

This explains the steps to compute the calculating WACC