Rate of Return for Stocks and Bonds




Resources: Corporate Finance

Calculate the following problems and provide an overall summary of how companies make financial decisions in no more than
700 words, based on your answers:

1.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.

2.Total Return: You bought a share of £196 preferred stock for $100 last year. The market price for your stock is now $120. What
was your total return for last year?

3.CAPM: A stock has a beta of 1.20, the expected market rate of return is 1296, and a risk-free rate of 5 percent. What is the
expected rate of return of the stock?

Q.WACC: The Corporation has a targeted capital structure of 8096 common stock and 2096 debt. The cost of equity is 1296 and
the cost of debt is 796. The tax rate is 3096. What is the compa ny’s weighted average cost of capital (WACC)?

5.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 of1096. The flotation cost on new debt is £196. What is the
initial cost ofthe plant ifthe company raises all equity externally?


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