Decision Making by Companies

Topic 

Decision Making by Companies

Instructions 

Assignment Steps

Resources: Corporate Finance

Calculate the following problems in Microsoft® Excel®: 

  1. Stock Valuation: A stock has an initial price of $100 per share, paid a dividend of $2.00 per share during the year, and had an ending share price of $125. Compute the percentage total return, capital gains yield, and dividend yield.
  2. Total Return: You bought a share of 4% preferred stock for $100 last year. The market price for your stock is now $120. What was your total return for last year?
  3. CAPM: A stock has a beta of 1.20, the expected market rate of return is 12%, and a risk-free rate of 5 percent. What is the expected rate of return of the stock?
  4. WACC: The Corporation has a targeted capital structure of 80% common stock and 20% debt. The cost of equity is 12% and the cost of debt is 7%. The tax rate is 30%. What is the company’s weighted average cost of capital (WACC)?
  5. Flotation Costs: Medina Corp. has a debt-equity ratio of .75. The company is considering a new plant that will cost $125 million to build. When the company issues new equity, it incurs a flotation cost of 10%. The flotation cost on new debt is 4%. What is the initial cost of the plant if the company raises all equity externally?

Provide an overall summary of how companies make financial decisions in no more than 700 words.

Answer Preview 

Better decision-making procedure results in informed decisions. McKinsey report indicates many steps which land companies into better financial benefits (Ross, Westerfield & Jordan 12-15). The report covers fundamental decisions which successful businessmen make on capital resources. The success of the decision-making process depends on the people involved, the driving force, the depth of synthesis done, and the level of politics involved (Lazaridis 5).  Disciplines associated with decision making include; making sure that skilled labor force is included in the process, decisions should be made in a transparent manner, and involving people tasked with implementation. The majority of investors aim at revenue increase and some decisions made pertaining to human resources majorly seek at improving production.

Word Count: 500