Rate of Return for Stocks and Bonds

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Purpose of Assignment

The purpose of this assignment is to allow the student an opportunity
to calculate the rate of return of equity and debt instruments. It
allows the student to understand the effects of dividends; capital
gains; inflation rates; and how the nominal rate of return affects
valuation and pricing. The assignment also allows the student to apply
concepts related to CAPM, WACC, and Flotation Costs to understand the
influence of debt and equity on the company’s capital structure.

Assignment Steps

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 4% 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 12%, and a risk-free rate of 5 percent. What is the expected rate of
    return of the stock?
  4. WACC: The Corporation has a targeted capital structure of 80% common
    stock and 20% debt. The cost of equity is 12% and the cost of debt is
    7%. The tax rate is 30%. What is the company’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 of 10%.
    The flotation cost on new debt is 4%. What is the initial cost of the
    plant if the company raises all equity externally?

Submit your summary and all calcluations.