Newark

12) Spencer Supplies' stock is currently selling for $60 a share. The firm is expected to earn $5.40 per share this year and to pay a year end dividend of $3.60. If investors require a 9% return, what rate of growth must be expected for Spencer?

As per CAPM

Growth = Required Return - Dividend per share / Price per share

Growth = 9% - 3.60 / 60

Growth = 9% - 6%

Growth = 3%

If Spencer reinvests earnings in projects with average returns equal to the stock's expected rate of return, what will be next year's EPS?

Next year EPS = Current EPS X (1 + Growth)

Next year EPS = 5.40 X (1 + 3%)

Next year EPS = 5.562

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15) a. Computation of maintain the present capital structure, how much of the new investment must be financed by common equity

Currently

Debt= 30 million

Equity= 30 million

Therefore Debt: Equity= 1:1

New funds required= 30 million

Therefore common equity will finance 15 million (remaining being financed by debt)

Hence the $15,000,000 amount invested must be financed by common equity

b. Proportion of debt= 30/60= 0.5

Proportion of equity= 30/60= 0.5

After tax cost of debt=rd (1-Tax rate) = 8% (1-40%) = 4.80%

Cost of equity= 12%

WACC=proportion of debt x after tax cost of debt + Proportion of equity x Cost of equity

Therefore WACC= 8.40% =0.5x4.8%+0.5x12%

WACC= 8.40%

Hence the WACC is 8.40%

c. If the capital structure is maintained ie Debt: Equity = 1:1 then WACC will remain the same. Retained earning is also part of equity. Thus instead of retained earning as in the previous case here the equity is being increased by the issue of new equity

a. to maintain the present capital structure, how much of the new investment must be financed by common equity? the answer is $15,000,000 how do I arrive at this number?...