SHOW WORK 9- A firm has a perpetual stock that pays quarterly dividend of $4.50. It...
SHOW WORK
9- A firm has a perpetual stock that pays quarterly dividend of $4.50. It current price is $ 93,50. What is the rate of return (r) and the effective annual rate (EAR)?
A r=19.25, EAR=22.33
B r=19.25, EAR=20.68
C r=22.33, EAR= 20.68
D r=19.25, EAR=19.44
E r=17.90, EAR=20.68
10- Merrill Lynch’s cost of retained earnings is 12%, cost of preferred stock is 47% and its cost of debt is 10%. The optimal capital structure is 20% common stock, 50% preferred stock and 30% of debt. The firm will not be issuing any new stock and the marginal tax rate is 30%. What is the weighted average cost of capital for Merrill Lynch?
A 28.90%
B 28.00%
C 29.40%
D 26.80%
E 26.88%
Homework Answers
9.
Nominal rate of return = 4.5 /93.5
= 4.81 % quaterly
Annual return = 4.81 *4
=19.25 %
Effectivev return = (1 + Nominal Rate / n)n - 1
= 20.68 %
Option B is correct.
10.
| Particular | Capital structure(%) | Expected return (%) | WACC(%) |
| Common stock | 20 | 12 | 2.4 |
| Preffered stock | 50 | 47 | 23.5 |
| Debt | 30 | (10%*70%) = 7% | 2.1 |
Option B is correct i.e. 28 % (2.4+23.5+2.1)
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