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Ten years ago, a firm issued $10 million in $1,000 par value bonds with an 8 percent coupon rate paid annually. The bonds mature 15 years from today and now sell at 97 percent of their par value. If a firms marginal tax rate is 28 %, what is its after tax cost of debt? Ans 6.02% 2. A company has $5 million in debt outstanding with a coupon rate of 12 percent. Currently the yield to maturity on these bonds is 14 percent. If the firms tax rate is 40 %, what is the companys after tax cost of debt? Ans 8.4% 3. An analyst gathered the following information about a manufacturing company: Expected cash dividend one year from today Rs. 6.00, expected growth rate 7%, current stock price Rs.72. Calculate the cost of equity? Ans Rs.15.33 4. The expected dividend is Rs. 2.50 for a share of stock priced at Rs. 25. What is the cost of equity if the long term growth in dividends is projected at 8%. Ans 18% 5. The expected dividend is Rs. 2.50 for a share of stock priced at Rs. 25. What is the cost of equity if the flotation cost is 10 % and the long term growth in dividends is projected at 8%. Ans 19.11% 6. An analyst gathered the following information about a manufacturing company: Capital Structure Required Rate of Return/ Cost 30% debt 10% 20% preferred stock 11% 50% common stock 18% Assuming a 40 %, what is after-tax-cost of capital must the company earn on its investments? Ans 13% 7. A company is planning a Rs. 50 million expansion, its going to be financed by selling Rs. 20 million in new debt and Rs. 30 million in a new common stock. The pre tax cost of debt is 9% and 14% for equity. If companys tax rate is 40%, what is companys marginal WACC? Ans 10.56% 8. The company has target capital structure of 40% debt and 60% equity. Bonds with face value of Rs. 1000 pay 10% coupon (semi annual payout), mature in 20 years and sell for Rs. 849.54. The companys stock beta is 1.2, risk free rate is 10% and market risk premium is 5%. The companys constant growth firm that just paid a dividend of Rs. 2 sells for Rs. 27 per share and has growth rate of 8%. Companys marginal tax rate is 40%. What is companys after tax cost of debt? Ans 7.2% Cost of equity using CAPM Ans 16% and discounted cash flow approach? Ans 16% What is companys marginal WACC? Ans 12.48%

Case 17: Aether Systems Common Stock Valuation: The Variable Growth Model -------------------------------------------------------------------------------Your task is to determine, using the discounted cash flow method, whether or not Reliance Power is fairly, over-, or under-valued. To complicate matters, since the firm only came into existence in 2009 and because they are growth oriented, they have yet to pay a dividend and do not plan to do so in the short to intermediate run. Instead, Reliance Power will only begin to pay a dividend 10 years from now. The expected annualized dividend at the end of year 10 will be $2.50 per share. This dividend is expected to grow at a rate of 9% over the next 5 years and will then taper off to a steady 4%, a rate at which it is assumed to grow forever. Answer the following questions using a discount rate of 13%. Questions Calculate the dividends over the first growth stage. Using the Gordon Growth Model, calculate the value of all remaining dividends at time 15. Calculate the present value (at time 0) of ALL future dividends. Assuming Reliance Power was currently trading at $10 per share, what would be your long-term recommendation for this stock: buy, sell, or hold?