1.The Big Easy Inc. target capital structure calls for 30% debt, 10% preferred stock, and 60% common equity. It has outstanding 25-year noncallable bonds with a face value of $1,000, a 9% semi-annual coupon, and a market price of $1,187.66. The tax rate is 40%. The company's preferred stock currently trades at $65 and pays a $5 annual dividend per share. The company's common stock, on the other hand, currently trades at $35 a share and just paid $4.56 annual dividend per share. The dividend is expected to grow at a constant rate of 3% a year. In addition, the risk-free rate is 6%, the average return on the market is 10%, and the firm's beta is 1.5. Given the following information, answer the following questions:

a)What is Big Easy's before-tax cost of debt r_d and after tax cost of debt r_d (1-T)?

b)What is the company's cost of preferred stock r_p?

c)What is the company's cost of common equity from retained earnings r_s using the three models : CAPM, DCF, and the own-bond-yield-plus-risk-premium. Assume the RP for the third method is 3%. State the r_s you will be using to calculate the WACC (the average).

d)What is the company's cost of common equity from new stock if the company would incur a 10% flotation cost from issuing new stocks.

e)What is the flotation cost adjustment?

f)What is the cost of external equity?

g)Calculate the WACC if the common equity comes from retained earnings.

h)Calculate the WACC if the common equity comes from new stocks.

i)If the company is considering the following capital budgeting projects:ProjectSizeRate of Return

A$1M13%

B$2M12.5%

C$2M12%

D$2M11.9%

E$1M11%

F$1M10.56%

G$1M10%

Which set of projects should be accepted?

Answer rating: 100% (QA)

Answer a To calculate the beforetax cost of debt rd and the aftertax cost of debt rd1T we can u... View the full answer