...10.1 http://webs.wichita.edu/longhofer/Fin340/Homeworks/Fin340_08S_HW9S.pdf 10.4 Current Share Value (P0) = $30 Expected annual dividend per share (D1) = $3 Constant Growth rate (g) = 5% a year (a) What is the Company’s Cost of Common Equity if all of its equity comes from retained earnings? Cost of Common Equity (R) = [D1 / P0] + g Cost of Common Equity (R) = [$3 / $30] + 0.05 Cost of Common Equity (R) = 0.15 (or) 15% Cost of Common Equity (R) = 15% (b) If the Company issued new stock, it would incur a 10% flotation cost. What would be the cost of equity from new stock? Cost of equity from new stock (R) = [D1 / P0 (1-flotation Cost)] + g Cost of equity from new stock (R) = [$3 / $30 (1-0.10)] + 0.05 Cost of equity from new stock (R) = [$3 / $30 (0.9)] + 0.05 Cost of equity from new stock (R) = [$3 / $27] + 0.05 Cost of equity from new stock (R) = 0.1611 (or) 16.11% Cost of equity from new stock (R) = 16.11% In this case, the cost of internal equity (or retained earnings) will be equal to the required rate of return on the stock (Rs) Here Rs = D1/P +g so, (3/30) + .05 = .10 + .05 = .15 (or 15%) Now, you have to factor in flotation costs to find the cost of external equity... Re (for external) =[ D1/(P*(1-F))] + g Here Re = [3/(30*(1-.10) ]+ .05 Re = 3/(30*.90) + .05 = 3/27 + .05 = .1111 + .05 so, Re = .1611 10.6 Dividend growth rate (g) = 7% per year Common Stock value (P0) = $23 per share Dividend just paid (or) Last dividend...
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...LECTURE 10: DURATION BONDS III FIN300 (Matt Marcinkowski, Fall '13) DURATION • Consider two bonds with 10 years to maturity and $1,000 face value (assume annual coupons/compounding): • Bond A: Coupon rate = 10% • Bond B: Coupon rate = 0% (discount paper) Yield Bond 8% A B $1,134.20 (+13.4%) $463.19 (+20%) 10% $1,000 $385.54 12% 887.00 (-11.3%) $321.97 (-16.5%) FIN300 (Matt Marcinkowski, Fall '13) DURATION • Now, consider two bonds with 10 percent coupon rate and $1,000 face value (assume annual coupons/compounding): • Bond C: Time to maturity = 5 years • Bond D: Time to maturity = 25 years Yield Bond 8% C D $1,079.85 (+8%) $1,213.50 (+21.4%) 10% $1,000 $1,000 12% $927.90 (-7.2%) $843.14 (-15.7%) FIN300 (Matt Marcinkowski, Fall '13) DURATION • We have observed the following: • The price of Bond A is less sensitive (in relative terms) to interest rate changes than the price of Bond B. • This is due to the fact that Bond A has a higher coupon rate (10%) than Bond B (0%) • We have also observed that: • The price of Bond C is less sensitive (in relative terms) to interest rate changes than the price of Bond D. • This is due to the fact that Bond D has a longer time to maturity than Bond C. FIN300 (Matt Marcinkowski, Fall '13) DURATION • Bond prices are more sensitive in relative terms to interest rate changes if the coupon rate is lower and if the time to maturity is longer. • To compare interest rate sensitivity of bonds with different coupon...
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...Company Analysis – Bank of America Corporation FIN300: Financial Management Professors Name NAME University February 27th, 2015 NAME Company Overview Bank of American Corporation is currently one of the largest banks in the US. It currently holds the 3rd largest bank place in deposits right after JP Morgan and Wells Fargo. It has locations from coast to coast and has been in business since 1904. Bank of America was funded in 1998, however before that it was called Bank of Italy. It is headquartered in Charlotte, North Carolina. Currently is ran under the leadership of Brian Moynihan, CEO. Bank of America offers a large array of financial solutions including retail banking, home lending, investments, wealth management, business lending, consumer lending, private banking and corporate banking. A couple of large institutions Bank of America acquired in the recent years are: Nations Bank and Countrywide. Its investment partner is Merrill Lynch. It currently trades by BAC at the New York Stock Exchange (NYSE). The current stock rate for BAC is $15.81. Stocks for BAC dropped just like it did for most banks in 2010. At one point it was around $5 a share. However, they have stabilized their stock specially by controlling their mortgage loans going in default, which was an issue acquired from the acquisition of Countrywide, and since then their stock have been consistently going up with an estimated end of year at $18.5 a share. Below is provided a copy of their last year...
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...Free eChapters (FALL 2012) eChapters offer students immediate access to the first few chapters of their textbooks while they are waiting for the print book to arrive. eChapters help students to keep up with required reading and assignments until they receive their course material, without having to pay expedited shipping costs. eChapters that are available from the publisher are attainable free of charge. How do students gain access to free eChapters? Not all courses or textbooks have eChapters available. For all courses where eChapters are available, the files are located in the student’s Blackboard course shell under the Student Center. Below is a list of courses with eChapters loaded into the course shells, giving students free access as of the first day of classes. * = eChapters are forthcoming Course ID ACC100 ACC206 ACC303 ACC304 ACC305 ACC306 Text Title Accounting Principles – 9th edition Accounting Principles – 9th edition Intermediate Accounting 14e Intermediate Accounting 14e Intermediate Accounting 14e Microcomputer Applications for Accounting Excel 2010 Microsoft® Excel 2010: A Case Approach, Complete, 1st Edition, copyright 2011 SOUTH WESTERN FEDERAL TAXATION 2012: COMPREHENSIVE, 36th ed. South-Western Federal Taxation 2013: Corporations, Partnerships, Estates and Trusts, 36th Edition Cost Accounting 13th 09 ed. Advanced Accounting 4th 10th ed. Auditing & Assurance Services 13th 10 ed. Core Concepts of Government and Not for Profit Accounting 2nd ed., 2011 ed ACC...
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