Separate sheet for each problem.
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The company of Arifin, Chigurapati, Hilliard, O’Brien and Oaks (ACHOO) is presently enjoying abnormally high growth because of a surge in the demand for their services. The company expects earnings and dividends to grow at a rate of 20% for the next 4 years, after which there will be no growth (g = 0) in earnings and dividends. The company’s last dividend, D0, was $1.50. ACHOO’s beta is 50% higher than that of the average stock, the market risk premium is 6%, and the risk-free rate is 4%. Determine the current price of the common stock.
(a) Several years ago the Haverford Company sold a $1,000 par value bond that now has 25 years to maturity and an 8.00% annual coupon that is paid quarterly. The bond currently sells for $900.90, and the company’s tax rate is 40%. What is the component cost of debt for use in the WACC calculation?
(b) Haverford uses debt, common equity and preferred stock in their capital structure. Using the following information AND the cost of debt calculated in part (a) above, determine the WACC for the company: (8pts)
- Preferred Dividend is $2.50 per share
- Price of Preferred is $22.72
- Weight of Debt is 40% and Weight of Equity is 45%
- Haverford estimates the cost of equity based on their debt yield plus a risk premium of 5.5
There is a bond with 19 years remaining until maturity. The bond pays a coupon of $45 every six months and has a yield to maturity of 6.77%.
There is a second bond also with 19 years remaining until maturity. This bond pays a $10 coupon every six months and has a yield to maturity of 6.77%.
If the yield to maturity for these bonds increases by 1% over the next year, what will the percentage change in bond price be for both of them over the course of the year?