Crab Cakes Ltd. has 5 million shares of stock outstanding selling at $15 per sha
ID: 2745302 • Letter: C
Question
Crab Cakes Ltd. has 5 million shares of stock outstanding selling at $15 per share and an issue of $10 million in 10 percent, annual coupon bonds with a maturity of 25 years, selling at 97 percent of par ($1000). If Crab Cakes' weighted average tax rate is 30 percent, its next dividend is expected to be $1.00 per share, and all future dividends are expected to grow at 5 percent per year, indefinitely, what is its WACC? 8.42% 10.84% 11.16% 11.52% A company's current stock price is $84.50 and it is likely to pay a $3.50 dividend next year. Since analysts estimate the company will have a 10% growth rate, what is its expected return? 4.14% 4.26% 10.00% 14.14% Compute the expected return given these three economic states, their likelihoods, and the potential returns: 3.5% 7.0% 7.5% 12.5%Explanation / Answer
1) Answer (3) 11.16%
Calculation of WACC :
Cost of Debt = (coupon payment + (face value - issue price)/No.of years) / ((face value + issue price)/2)
= (100 + (1000 - 970) /25) / (1000+970)/2
= (100 + 1.2) / 985
= 10.274%
After tax cost of Debt = 7.192% (10.274 - 30%)
Cost of Equity = (Next year dividend / Current selling price) + Growth rate
= (1/15) +0.05
= 11.67%
Total equity = $75 million
Total debt = $10 million
WACC = (11.67 * (75 / 85)) + (7 * (10/85))
= 10.30 + 0.85
= 11.16% (Approx)
2) Answer (4) 14.14%
Calculation :
Expected return = (Next year dividend / Current selling price) + Growth rate
= (3.50 / 84.50) + 0.10
= 14.14%
3) Answer (2) 7%
Calculation :
Expected return = (0.2 * 23%) + (0.6 * 14%) - (0.2 * 30%)
= 4.6% + 8.4% - 6%
= 7%