The corporate treasurer of Ajax Company expects the company to grow at 4% in the future,

| November 29, 2016

Question
1 The corporate treasurer of Ajax Company expects the company to grow at 4% in the future, and debt securitiesat 6% interest (tax rate = 30%) to be a cheaper option to finance the growth. The current market price per share of its common stock is $39, and the expected dividend in one year is $1.50 per share. Calculate the cost of the company’s retained earnings and check if the treasurer’s assumption is correct.

2 The risk-free rate on 10-year U.S. Treasury bills is 3% and the expected rate of return on the overall stock market is 11%.
The company has a beta of 1.6. What is the cost of equity?

3 A company has a capital structure as follows:
Total Assets $600,000
Debt $300,000
Preferred Stock $100,000
Common Equity $200,000
What would be the minimum expected return from a new capital investment project to satisfy the suppliers of the capital?

4 Required rate of return is 10%.
Net Cash Flow
Year Project A Project B
0 -$2,000 -$2,500
1 $900 $1,500
2 $1,100 $1,300
3 $1,300 $800
a) Calculate the payback period for each project.

b) Calculate the net present value for each project.

c) Which project do you think will be approved, if only one project can be approved? Why?

d) What if the required rate of return was 20%?

5 A corporate bond has a face value of $1,000 and an annual coupon interest rate of 7%. Interest is paid annually.
10 years of the life of the bond remain. The current market price of the bond is $872. To the nearest whole percent, what is the yield to maturity (YTM) of the bond today?

6 Ajax Manufacturing is expected to pay a dividend of $8 per share next year. The dividend growth rate is expected to continue to be 3%.
Required rate of return is 14%.
a) What should be the current market price per share?

b) What is the annual rate of return if you purchase the stock at $65?

7 A common stock sells for $82 per share, has a growth rate of 7% and a dividend that was just paid of $3.82. What is the annual percent yield per share?

8 A corporate bond has a face value of $1,000 and an annual coupon interest rate of 6%. Interest is paid annually.
12 years of the life of the bond remain. The current market price of the bond is $1,027, and it will mature at $1,100.
To the nearest whole percent, what is the yield to maturity (YTM) of the bond today?

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