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# Fraylor & Trancis Inc. has a D/E-ratio of 25%. Its unlevered beta is 1.2. The risk-free rate of debt amounts to 5% and the equity market risk premium is 6%. Fraylor is exempt from corporate taxes. The stream of dividends is as follows (dividend in period 1 to be paid in one year from now): Period 1 2 3 to

Fraylor & Trancis Inc. has a D/E-ratio of 25%. Its unlevered beta is 1.2. The risk-free rate of debt amounts to 5% and the equity market risk premium is 6%. Fraylor is exempt from corporate taxes.

The stream of dividends is as follows (dividend in period 1 to be paid in one year from now):

Period | 1 | 2 | 3 to infinity | |

Dividends per share | 3.8 | 4 | 4.2 | |

Annual growth rate (g) | 4% |

- What is the rate of return that Fraylor's shareholders expect?
- What is the fair price of Fraylor's stock? (Assume the cost of equity capital to be 15% if you could not come up with a solution for part a). Note that this is not the right answer for part a).
- What is the total firm value value of Fraylor if the corporation has 500.000 shares outstanding?
- What would you recommend Fraylor's CFO to do if her goal is to optimize the capital structure?

**Related Book For**

## Income Tax Fundamentals 2013

31st Edition

Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill

ISBN: 9781285586618

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