1) The Miller Co. just issued a dividend of $2.75 per share on its common stock. The company is expected to maintain a constant 5.8 percent growth rate in its dividends indefinitely. If the stock sells for $59 a share, what is the company’s cost of equity? (5 Marks) 2) The McNut Corporation’s common stock has a beta of 1.2. If the risk-free rate is 4.8 percent and the expected return on the market is 11 percent, what is the company’s cost of equity capital? (5 Marks) 3) Temple Bank has an issue of preferred stock with a $4.25 stated dividend that just sold for $92 per share. What is the bank’s cost of preferred stock? (3 Marks) 4) Beddeck Inc. is trying to determine its cost of debt. The firm has a debt issue outstanding with 18 years to maturity that is quoted at 107 percent of face value. The issue makes semiannual payments and has a coupon rate of 6 percent. Assume the par value of the bond is $1,000. a) What is the company’s pre-tax cost of debt? (6 Marks) b) If the tax rate is 35 percent, what is the after-tax cost of debt? (2 marks) 5) Smitty’s Corporation has a target capital structure of 60 percent common stock, 5 percent preferred stock, and 35 percent debt. Its cost of equity is 12 percent, the cost of preferred stock is 5 percent, and the before tax cost of debt is 7 percent. The relevant tax rate is 35 percent. What is Smitty’s WACC? (6 Marks) 6) Given the following information for Eastern Power Co., find the WACC. Assume the company’s tax rate is 35 percent. (23 Marks) Debt: 8,000 6.5 percent coupon bonds outstanding, $1,000 par value, 25 years to maturity, selling for 106 percent of par; the bonds make semiannual payments. Common stock: 310,000 shares outstanding, selling for $57 per share; the beta is 1.05. Preferred stock: 15,000 shares of 4 percent preferred stock outstanding, currently selling for $72 per share. Market: 7 percent market risk premium and 4.5 percent risk-free rate
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