## [answered] 1. The dividends of Company A are expected to grow at the c

1. The dividends of Company A are expected to grow at the constant rate of 5%. The last dividend

pay-out was \$2.10 per share. The risk adjusted rate of return is 12%. The current market price of

the share is \$35. Should you purchase the share?

2. Calculate the WACC for a company with 10B in equity, 2B in debt with an average interest rate of

4%, a beta of 1.2, a risk free rate of 0.5%, and a market risk premium of 5%.

3. A company is considered 2 project (Project A and B) and analyze to choose only one of them.

The projected cash are as follows:

Year Project A Cash Flow Project B Cash Flow 0 -1,000,000 -2,200,100 1 500,000 400,000 2 200,000 600,000 3 630,000 800,000 4 750,000 1,000,000 Company?s WACC = 10%.

a) Using different capital budgeting methods to compute the Payback, NPV, IRR for the project.

Which project should be chosen in each method.

b) Explain your choice for the project and make comparisons between methods used above

(How it is exactly?)

4. Given that a coupon rate on bond X is 10% and has 10 years to maturity. An investor put a call

option on bond X with a strike price of \$120. The call option expires today at a time when bond X

is selling to yield 8%. Should investor exercise the call option?

Hint: Find the current price of bond X: P with semiannual payment.

5. Assumes that a current price of A stock is \$20 per share. What is the expected growth rate of

dividends for this stock when their current dividend is \$1 per share and rate of return is 10

percent?

Hint: Constant growth dividend valuation model.

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