3. Westover Winds just paid a dividend of $2.50 per share.

The company will increase its

dividend by 8 percent next year and will then reduce its dividend growth rate by 2
percentage points per year until each reach the industry average of 2 percent dividend
growth, after which the company will keep a constant growth rate forever. What is the
price of this stock today given a required rate of return of 12 percent?

ANSWER:
D1=2.50 ( 1+ 0.08 )=2.70

D 2=2.70 ( 1+ ( 0.080.02 ) )=2.862

D3=2.862 ( 1+ ( 0.060.02 ) )=2.976

D 4=2.976 ( 1+ ( 0.040.02 ) )=3.035

2.70 2.862 2.976 3.035+ 30.957

P 4= + + + =$ 28.413
(1+ 012 ) (1+012)2 (1+ 0.12 ) 3 ( 1+0.12 ) 4

7. How does the net present value decision ( NPV) rule relate to the primary goal of financial
management , which is creating wealth for shareholders?

ANSWER:

One of the primary goals of firm is to maximise shareholders wealth which then could
maximise the value of the firm through dividend and capital gains.

Therefore, through net present value (NPV) method, all the present values all
expected cash flows were summed up if the project is undertaken and minus with
the initial capital outlay required in investing in the project.
If the NPV value is positive which means greater than zero, then the project can be
proceed since it could increases shareholder wealth.
If the NPV value is negative which is less than zero, then the project does not worth
to invest because it decreases shareholder wealth.
Example, the present value of net cash flows of a project is RM270,000 which is
greater than the initial outlay of RM200,000. Then this project is acceptable at 10%
required rate of return.

10. Stock in Country Road Industries has a beta of 0.97. The market risk premium is 10 percent
while T-Bills are currently yielding 5.5 percent. Country Roads most recent dividend was
$1.70 per share, and dividend are expected to grow at 7 percent annual rate indefinitely.
 The stock sells for $32 a share. What is the estimate cost of equity using the average of the
CAPM approach and the dividend discount approach?

ANSWER:
CAPM Method:
= 0.97
R m = 0.10
R f = T-Bills = 0.055
R e = R f + ( R m )
= 0.055 + 0.97( 0.10 )
= 0.152 @ 15.2%
Dividend Discount Method:
D = $1.70
P = $3.20
D o (1+ g)
g = 7% Po= Rg
D o (1+ g)
Re= +g
P
1.70 (1+ 7 )
= +7
32
= 12.68%

11.What role does the weighted average cost of capital play when determining a projects
cost of capital?

ANSWER:
WACC is the cost of capital for the firms mixture of debt , common stock and
preferred stock which are the sources of funds to finance their investment.
It helps to determine the amount of interest or the cost of debt the company has to
pay for every dollar it finance through bonds by determine the required rate of
return of debt, kd.
It tells us the rate of return that stockholders and lenders expected from investing
in certain projects which these rate would be the cost of the project.
It also helps to determine the appropriate value of discount rate when computing
NPV in order to make sure the worth of the project.
Example, when certain project has high risk, then the firms WACC will be
adjusted according to the level of riskiness of the project so that it would not cause
a loss.