Question

Mead Plastics data regarding cost of capital is as follows: Bonds Yield to Maturity is 12% Preferred Stock value is $70 Common Stock value is $50 Dividends in Preferred Stocks are $7.15 Last year dividends in Common Stocks was $3.00 Flotation Costs in Preferred Stocks are $5 per share Flotation Costs in Common Stocks are 10% of value Growth rate in dividends is 6% Tax rate is 25% Optimal Capital Structure Debt = 20% Preferred Stock = 30% Common Equity = 50%

Answer 1

The subject of this question is Business, and it is about the application of present discounted value (PDV) to stocks and bonds. PDV is used to calculate appropriate prices for investments based on their future expected payments. Stocks are valued based on expected future profits, and bonds' yield to maturity is affected by interest rate movements.

Step-by-step explanation:

The subject of this question is Business. The question is asking about the present discounted value (PDV) and its application to stocks and bonds. PDV is a concept used to calculate appropriate prices for stocks and bonds based on their future expected payments. This calculation requires an interest rate to determine the present value of future payments.

To apply PDV to a stock, you need to consider the expected future profits of the company. In the given example of Babble, Inc., the profits are expected to be $15 million immediately, $20 million in one year, and $25 million in two years. Dividing the present discounted value of these profits by the number of shares will give you the price per share.

For bonds, PDV can be used to determine their yield to maturity. The yield on a bond represents both the interest payments and potential capital gains. When interest rates rise, previously issued bonds with lower rates will sell for less than their face value, while those with higher rates will sell for more.