The corporate treasurer of Gator Electronics Corporation

1. The corporate treasurer of Gator Electronics Corporation expects the company to grow at 4% in the future, and assumes debt securities at 6% interest (tax rate = 30%) to be a cheaper option to finance the growth. The current market price per share of its common stock is $39, and the expected dividend in one year is $1.50 per share. Calculate the cost of the company’s retained earnings and check if the treasurer’s assumption is correct. 2. The risk-free rate on 10-year U.S. Treasury bills is 3% and the expected rate of return on the overall stock market is 11%. If Gator Electrics has a beta of 1.6. What is the cost of equity? 3. A company has a capital structure as follows: Total Assets $600,000 Debt $300,000 Preferred Stock $100,000 Common Equity $200,000 What would be the minimum expected return from a new capital investment project to satisfy the suppliers of the capital? Assume the applicable tax rate is 40%, interest on debt is 11%, flotation cost per share of preferred stock is $0.75, and flotation cost per share of common stock is $4. The preferred and common stocks are selling in the market for $26 and $143 a share respectively, and they are expected to pay a dividend of $2 and $7, respectively, in one year. The company’s dividends are expected to grow at 13% per year. The firm would like to maintain the existing capital structure to finance the new project. Answer: The minimum expected return from a new capital investment project is the WACC plus any additional risk premium. Since no additional risk is mentioned, we will use the WACC.

4. Ajax Manufacturing dividend is $8 per share of common stock in one year. The dividend growth rate is 3%. Required rate of return is 14%. a) What is the current market price per share? b) What is the annual rate of return if you purchase the stock at $65?