UMUC FIN 610 Team Project Steps Four-Six

UMUC FIN 610 Team Project Steps Four-Six



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FIN 610 Team Project Steps Four-Six (UMUC)
Step Four
Another option for financing is to call in the outstanding bonds you have issued and obtain a loan with more favorable terms than the bonds you would issue. Presently, the company has a 6% coupon bond that matures in 11 years. The bond pays interest semiannually.
What is the market price of a $1,000 face value bond if the current rate of interest is 12.9%?

Step Five
The company’s common stock is going to pay a dividend of $2.00 per share after one year. Dividends are expected to grow at 10 percent per year for 2 years after that ($2.20 two years from now, and $2.42 3 years from now), and 4% thereafter.
The expected market return is 6%, your stock has a beta of 1.2. The return on riskless government bonds is 2%.
1. Assuming CAPM is correct, what should be the price of the stock?
2. Suppose the market price of the stock is $70 (different from the price that the CAPM discount rate says it should be), what would you tell the investors about investing in the stock?
Step Six

​The weighted average cost of capital includes all sources of capital. The higher the WACC becomes, then the higher the rate of return on equity and an increase in risk which causes the beta to rise. Our company has a 75% weigh of equity, with a 25% weight of debt. Our current return on equity is 10.44%. WACC can be lowered by cutting financing costs, lowering equity costs, or lowering the amount of debt. Our company has a WACC of 9.03%. Investors by putting money into our company would expect that their returns would be higher than 9.03% when they are putting their money. If stakeholders do not see these kinds of returns, it could cause future stakeholders to put their money somewhere else. Due to our WACC being 9.03%, we should pursue projects that will give a higher return than 9.03% as well, and this will increase our equity and therefore lowering our WACC, to increase stakeholder confidence.

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