Financial manegment

1.

Nonconstant Growth.

Lake Osborne, Inc., is a young start-up company. No dividends will be paid on the stock over the next nine years, because the firm needs to plow back its earnings to fuel growth. The company will then pay a dividend of $20 per share 10 years from today and will increase the dividend by 5 percent per year thereafter. If the required return on this stock is 15 percent, what is the current share price?

Dividend for year 1 ~ 9 = ??

Dividend for year 10 = ??

Dividend growth rate since year 10 = ??

Discount rate = ??

Price at the end of year 9 = p9 = ??

Current price = P0 = ??

2.

LED lights bulbs typically cost $3.50, have a life of 9 years, and use about $1.60 of electricity a year.

Conventional light bulbs are cheaper to buy, for they cost only $.50.

On the other hand, they last only about a year and use about $6.60 of energy.

If the real discount rate is 5%, what is the cost of the two products over 9 years? Which one is better cost-wise?

Cash flow

1) LED lights

Cash flow from LED lights

CF0, CF1, … CF9 = ??

Present value = ??

2) Conventional lights

Cash flow till year 9

CF0, CF1, … CF9 = ??

Present value = ??

3.

Finding the WACC.

Given the following information for Delray Food Co., find the WACC. Assume the company’s tax rate is 35 percent.

  • Debt:
    • $1,000 par value
    • 9,500 of 7 percent coupon bonds outstanding,
    • 25 years to maturity
    • selling for 118 percent of par;
    • the bonds make semiannual payments.
  • Common stock:
    • 200,000 shares outstanding,
    • selling for $87 per share;
    • beta is 1.25.
    • 7 percent market risk premium and 3.1 percent risk-free rate.
  • Preferred stock:
    • 15,000 shares of 4.8 percent preferred stock outstanding,
    • currently selling for $100 per share.

    Please fill in all the blacks in this box for total

tax rate ??
after-tax cost * wgt
mkt value weight % before tax cost after-tax cost cost components
Debt ? ? ? ? ?
Stock ? ? ? ? ?
Preferred ? ? ? ? ?
Total value ?
WACC ?

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