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PepsiCo’s historical dividend payment and current price. Historical dividends
are available in the historical price section. Use these payments to find the
annual
dividend growth rate. (If you have a quarterly pattern be sure to annualize this
quarterly growth rate.) Now, find the required rate of return for this stock,
assuming
that the future dividend growth rate will remain the same and the company has
an
infinite horizon. Does this return seem reasonable for PepsiCo?
Chapter 9 – Q10
10. Net present value. Lepton Industries has four potential projects, all with an
initial cost of $1,500,000. The capital budget for the year will allow Lepton to
accept only one of the four projects. Given the discount rates and the future
cash flows of each project, determine which project Lepton should accept.
ANSWER:
Chapter 11 – Q12
12. Book value versus market value components. The CFO of DMI is trying to
determine the company’s WACC. Brad, a promising MBA, says that the
company should use book value to assign the components percentage for the
WACC. Angela, a long-time employee and experienced financial analyst, says
the company should use market value to assign the components. The after-tax
cost of debt is at 7%, the cost of preferred stock is at 11%, and the cost of equity
is at 14%. Calculate the WACC using both the book value and market value
approaches with the following information. Which do you think is better? Why?
Chapter 16
9. Finding the WACC. Monica is the CFO of Cooking for Friends (CFF) and
uses the pecking order hypothesis (POH) philosophy when she raises capital for
company projects. Currently, she can borrow up to $600,000 from her bank at a
rate of 8.5%, float a bond for $1,100,000 at a rate of 9.25%, or issue additional
stock for $1,300,000 at a cost of 17%. What is the WACC for CFF if Monica
chooses to invest: a. $1,000,000 in new projects? b. $2,000,000 in new projects?
c. $3,000,000 in new projects?