Financial Calculations for Various Corporations

    Financial Calculations for Various Corporations In this essay, we will solve a series of financial problems related to Rayburn Corporation, Roscoe Raspberry Corp., Wise Corporation, Smart Corporation, Sage Corp., Prudent Corp., Guru Corp., Shrewd Corp., and Sharp Corp. Each problem will focus on calculating different aspects of the companies' costs of equity, costs of debt, and overall weighted average cost of capital (WACC). 1. Current Stock Price of Rayburn Corporation Given: - Annual Dividend (D) = $3.76 - Required Return (r) = 3.89% Formula: [ \text{Price} = \frac{D}{r} ] Calculation: [ \text{Price} = \frac{3.76}{0.0389} \approx 96.75 ] Current Stock Price: $96.75 2. Cost of Equity for Roscoe Raspberry Corp. Given: - Last Dividend (D0) = $2.53 - Growth Rate (g) = 3.30% - Current Stock Price (P0) = $39.16 Formula: [ r = \frac{D1}{P0} + g ] Where ( D1 = D0 \times (1 + g) ) Calculation: [ D1 = 2.53 \times (1 + 0.033) \approx 2.61 ] [ r = \frac{2.61}{39.16} + 0.033 \approx 0.0667 + 0.033 = 0.0997 \approx 9.97% ] Cost of Equity: 9.97% 3. Cost of Equity for Wise Corporation Given: - Beta (β) = 1.21 - Market Risk Premium (MRP) = 7.20% - Risk-Free Rate (RFR) = 2.94% Formula: [ r = RFR + β \times MRP ] Calculation: [ r = 2.94 + 1.21 \times 7.20 \approx 2.94 + 8.712 = 11.652% ] Cost of Equity: 11.65% 4. Advantages and Disadvantages of SML Approach Advantages: - Clarity: Provides a clear visual representation of the relationship between risk and expected return. - Market-Based: Reflects investor expectations and market conditions. Disadvantages: - Estimation Risk: Requires accurate estimation of beta and market risk premium. - Market Conditions: The method may not work well in volatile markets. Required Information: - Beta, risk-free rate, and market risk premium. Observability: Most variables need estimation; betas can be derived from historical data while market risk premiums are often based on historical averages. Ways to Get Estimates: - Historical analysis, financial databases, and analyst reports. 5. After-Tax Cost of Debt for Smart Corporation Given: - Coupon Rate = 6.1% - Face Value = $2,000 - Current Price = $1,933 - Tax Rate = 21% Formula: First, find YTM using the formula for semiannual payments. Using ( P = \sum \frac{C}{(1+r)^t} + \frac{F}{(1+r)^N} ) Assuming the YTM is approximately the coupon rate due to slight price deviation: YTM Calculation: Using approximation: [ YTM \approx \frac{C + (F - P)/N}{(F + P)/2} ] Where ( C = 0.061 \times 2000 / 2 = 61 ), ( F = 2000 ), ( P = 1933 ), ( N = 38 ) Calculating gives ( YTM ≈ 6.25% ). After-Tax Cost of Debt Calculation: [ r_d = YTM \times (1 - Tax Rate) = 6.25% \times (1 - 0.21) \approx 4.9375% ] After-Tax Cost of Debt: 4.94% 6. WACC for Sage Corp. Given: - Cost of Equity (re) = 10.7% - YTM on Bonds (rd) = 5.3% - Tax Rate = 21% - Book Value of Debt = $381,000 - Total Assets Book Value = $943,000 - Market-to-Book Ratio = 2.47 Calculations: 1. Calculate market value of equity: - Total shares: ( 495,000 \times 63 = 31,185,000 ) - Total Debt Market Value: ( 381,000 / .927 = approx.;410,000 ) 2. Calculate WACC: [ WACC = \frac{E}{V} * r_e + \frac{D}{V} * r_d * (1 - T) ] Where: - ( V = E + D ) Assuming ( D ≈ $410,000 ) and ( E ≈ $31,185,000 ): [ V ≈ 31,595,000 ] Plugging in values: [ WACC ≈ \frac{31,185,000}{31,595,000} * .107 + \frac{410,000}{31,595,000} * .053 * (1 - .21) ] Calculating gives approximately WACC ≈ 10%. 7. WACC for Prudent Corp. Given Data: - Common Stock Price per Share: $81 - Shares Outstanding: 16,100 - Rate of Return on Equity: 11.85% - Bonds Outstanding: 340 - Par Value per Bond: $2,000 - Pre-Tax Cost of Debt: 6.25% - Bonds Selling Price: $1980 - Tax Rate: 21% Calculations: 1. Market Value of Equity (E): [ E = Price \times Shares = 81 \times 16,100 = $1,303,100 ] 2. Market Value of Debt (D): [ D = Bonds \times Price per Bond = 340 \times 1980 = $673,200 ] 3. Total Value (V): [ V = E + D = $1,303,100 + $673,200 = $1,976,300 ] 4. WACC Calculation: [ WACC = \left(\frac{E}{V} * r_e\right) + \left(\frac{D}{V} * r_d * (1 - T)\right) ] Substituting values: [ WACC ≈ \left(\frac{1,303,100}{1,976,300} * .1185\right) + \left(\frac{673,200}{1,976,300} * .0625 * .79\right) ] Calculating gives approximately WACC ≈ 9%. Conclusion This essay has covered various financial calculations for different corporations focusing on their stock prices, costs of equity and debt, and WACC. These calculations are essential for investors in making informed decisions regarding investments in these companies.  

Sample Answer