**TI82** TxtView file generated by CalcText - Kouri& chap9ÿChap9cost / cash flow = payback period Expected cash flow = .80 × $1000 + .20 × $500 = 900 Price = 900/(1.1)2 = $743.80 Price = 900/(1.1)2 = $743.80 Answers: a. g = retention rate × return on new invest = (2/5) × 15% = 6% b. P = 3 / (12% – 6%) = $50 c. g = (1/5) × 15% = 3%, P = 4 / (12% – 3%) = $44.44. No, the projects are positive NPV (return exceeds cost of capital), so don’t raise the dividend. C.What is Luther's weighted average cost of capital? Answer: rU = rE + (1 - Tc) *rD = (13%) + (7%)(1 - .4) = 10.8% a. What is Luther's unlevered cost of capital? Answer: rU = rE + rD = (13%) + (7%) = 11.5% b. What is Luther's after-tax debt cost of capital? Answer: Effective after-tax interest rate = r(1 - Tc) = .07(1 - .40) = .042 or 4.2% CHAP 9 : Dfree cash flow model: Vn = (1+gFCF/rE+ gFCF) x FCFn Et : Vo= FCFn/ (1+rwacc) + FCFn/ (1+rwacc)^2+...+ FCFn + Vn / (1+..)^N Donc: Po = Vo + cash -debt/ share outstanding DD model : one year investor : P = (div +P1/1+rE) rE= Div /Po (div yield) + P1-P0/PO (capital gain rate) total return = divi yield + capital gain Constant dividend growth model: Po = Div1/ rE-g rE= Div1/Po + g Simple model of growth DivT= earnings / share outstanding x div payout ratio ÿ¾j