ABC Co. has the following dividend payment history

| June 10, 2016

Question
ABC Co. has the following dividend payment history:

Year

Dividend

2003

$1.00

2004

1.15

2005

1.25

2006

1.35

2007

1.45

a. How many periods of growth are there in the information given?

4 periods

b. What is the compound growth rate of dividends?

c. Calculate the year-to-year growth rates in dividends.

d. What is the average year-to-year dividend growth rate?

e. Assume a retention ratio of 0.45 and a historical return on equity (ROE) of 0.18. Using these two additional pieces of information, calculate an alternative estimate of dividend growth rate, g.

2. Mustard Patch Doll Company needs to purchase new plastic moulding machines to meet the demand for its product. The cost of the equipment is $100,000. It is estimated that the firm will generate, after tax, operating cash flow (OCF) of $22,000 per year for the next seven years. The firm is financed with 40% debt and 60% equity, both based on market values. The firm’s cost of equity is 16% and its pre-tax cost of debt is 8%. The flotation costs of debt and equity are 2% and 8%, respectively. Assume the firm’s tax rate is 34% and ignore the effects of CCA depreciation.

a. What is the firm’s tax adjusted WACC?

b. Ignoring flotation costs, what is the NPV of the proposed project?

c. What is the weighted average flotation cost, fA, for the firm?

d. What is the dollar flotation cost of the proposed financing?

e. After considering flotation costs, what is the NPV of the proposed project?

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