P$9-13$ Retained earnings versus new common stock Using the data for each firm shown in

the following table, calculate the cost of retained earnings and the cost of new com$-$

mon stock using the constant$-$growth valuation model.

P$9-14$ The effect of tax rate on WAOC Rayyan Games, an IT firm, wishes to explore the ef$-$

fect on its cost of capitai of the rate at which the company pays taxes. The firm wishes

to maintain a capital structure of $40\%$ debt, $30\%$ preferred stock, and $30\%$ com$-$

mon stock. The cost of financing with retained earnings is $12\%,$ the cost of preferred

stock financing is $8\%,$ and the before$-$tax cost of debt financing is $6\%.$ Calculate the

weighted average cost of capital $($WACC$)$ given the tax rate assumptions in parts a to $C.$

a$.$ Taxrate $=40\%$

b$.$ Taxrate $=35\%$

c$.$ Taxrate $=15\%$

d$.$ Describe the relationship between changes in the rate of taxation and the WACC.

Do you think higher or lower tax rates make debt financing more attractive? Why?

P$9-15$ WACC: Market value weights Boots Mechanics is based in Manchester, United

Kingdom. The market values and after$-$tax costs of various sources of capital used

by the company are shown in the following table.

a$.$ Calculate the WACC for Boots Mechanics.

b$.$ Explain how the company can use the WACC if it wants to invest in a new project.

P$9-16$ Calculation of individual costs and WACC Carnival Corporation $($CCL$)$ recently

sold new bonds at a discount price of $$990.$ The bonds have a short three$-$year matu$-$

rity, have an $11\mathrm{.}5\%$ coupon rate, and pay interest semi$-$annually. In addition to the

$$10\mathrm{.}913$ billion worth of bonds outstanding, Carnival also has $$11\mathrm{.}014$ billion worth

of common stock equity outstanding. Carnival's stock has a beta of $1\mathrm{.}96.$ Currently

the expected return on the market portfolio and the risk$-$free rate are $6\mathrm{.}8\%$ and

$0\mathrm{.}38\%,$ respectively.

a$.$ Calculate the market value weights for Carnival's capital structure.

b$.$ Calculate Carnival's cost of equity using the CAPM.

c$.$ Calculate Carnival's before$-$tax cost of debt.

d$.$ Calculate Carnival's current WACC using a $21\%$ corporate tax rate.