Dobson Dairies has a capital structure that consists of 60 percent long-term debt and 40 percent common stock. The company’s CFO has obtained the following information: The before-tax yield to maturity on the company’s bonds is 8 percent. The company’s common stock is expected to pay a P3.00 dividend at year end (D1 = P3.00), and the dividend is expected to grow at a constant rate of 7 percent a year. The common stock currently sells for P60 a share. Assume the firm will be able to use retained earnings to fund the equity portion of its capital budget. The company’s tax rate is 40 percent. What is the company’s weighted average cost of capital (WACC)? Group of answer choices 8.03% 9.34% 12.00% 7.68% 8.00% 2. Super Sounds is expecting a period of intense growth and has decided to retain more of their earnings to help finance that growth. As a result, they are going to reduce the annual dividend by 20 percent a year for the next three years. After that they will maintain a constant dividend of P1 a share. Last year, the company paid P2.25 as the annual dividend per share. What is the market value of this stock if the required rate of return is 16 percent? P7.36 P8.08 P6.63 P9.61 3. MJ Co. pays out 60% of its earnings as dividends. Its return on equity is 20%. What is the stable dividend growth rate for the firm? 3% 12% 5% 8%

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter7: Common Stock: Characteristics, Valuation, And Issuance

Section: Chapter Questions

Problem 8P

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Question

1. Dobson Dairies has a capital structure that consists of 60 percent long-term debt and 40 percent common stock. The company’s CFO has obtained the following information:

The before-tax yield to maturity on the company’s bonds is 8 percent.
The company’s common stock is expected to pay a P3.00 dividend at year end (D1 = P3.00), and the dividend is expected to grow at a constant rate of 7 percent a year. The common stock currently sells for P60 a share.
Assume the firm will be able to use retained earnings to fund the equity portion of its capital budget.
The company’s tax rate is 40 percent.

What is the company’s weighted average cost of capital (WACC)?

Group of answer choices

8.03%

9.34%

12.00%

7.68%

8.00%

2. Super Sounds is expecting a period of intense growth and has decided to retain more of their earnings to help finance that growth. As a result, they are going to reduce the annual dividend by 20 percent a year for the next three years. After that they will maintain a constant dividend of P1 a share. Last year, the company paid P2.25 as the annual dividend per share. What is the market value of this stock if the required rate of return is 16 percent?

P7.36

P8.08

P6.63

P9.61

3. MJ Co. pays out 60% of its earnings as dividends. Its return on equity is 20%. What is the stable dividend growth rate for the firm?

12%

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