The bouchard company's eps is 6.50

Complete the following problems from your textbook:

· Pages 378–381: 10-1, 10-2, 10-16, and 10-20.

· Pages 443–444: 12-7 and 12-9.

· Page 469: 13-5.

· 10-1 How would each of the following scenarios affect a firm’s cost of debt, rd(1 − T); its cost of equity, rs; and its WACC? Indicate with a plus (+), a minus (−), or a zero (0) whether the factor would raise, lower, or have an indeterminate effect on the item in question. Assume for each answer that other things are held constant, even though in some instances this would probably not be true. Be prepared to justify your answer but recognize that several of the parts have no single correct answer. These questions are designed to stimulate thought and discussion.

Effect on

rd(1 − T)

rs

WACC

a. The corporate tax rate is lowered.

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b. The Federal Reserve tightens credit.

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c. The firm uses more debt; that is, it increases its debt ratio.

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d. The dividend payout ratio is increased.

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e. The firm doubles the amount of capital it raises during the year.

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f. The firm expands into a risky new area.

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g. The firm merges with another firm whose earnings are countercyclical both to those of the first firm and to the stock market.

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h. The stock market falls drastically, and the firm’s stock price falls along with the rest.

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i. Investors become more risk-averse.

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j. The firm is an electric utility with a large investment in nuclear plants. Several states are considering a ban on nuclear power generation.

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· 10-2 Assume that the risk-free rate increases, but the market risk premium

· 10-16 COST OF COMMON EQUITY The Bouchard Company’s EPS was $6.50 in 2018, up from $4.42 in 2013. The company pays out 40% of its earnings as dividends, and its common stock sells for $36.00.

· a. Calculate the past growth rate in earnings. (Hint: This is a 5-year growth period.)

· b. The last dividend was D0 = 0.4($6.50) = $2.60. Calculate the next expected dividend, D1, assuming that the past growth rate continues.

· c. What is Bouchard’s cost of retained earnings, rs?

· 10-20 WACC The following table gives Foust Company’s earnings per share for the last 10 years. The common stock, 7.8 million shares outstanding, is now (1/1/19) selling for $65.00 per share. The expected dividend at the end of the current year (12/31/19) is 55% of the 2018 EPS. Because investors expect past trends to continue, g may be based on the historical earnings growth rate. (Note that 9 years of growth are reflected in the 10 years of data.)