Question 10 (10 points)

Do Problem 10-8 on page 371 of the book. STATE YOUR ANSWER IN PERCENT AND ROUND IT TO ONE DECIMAL PLACE. DO NOT USE A PERCENT SIGN.__________

Chapter 10 The Cost of Capital 371 10-4 COST OF EQUITY WITH AND WITHOUT FLOTATION Jarett & Sons's common stock currently trades at $30,00 a share. It is expected to pay an annual dividend of $1.00 a share at the end of the year (D. = $1.00), and the constant growth rate is 4% a year. a. What is the company's cost of common equity if all of its equity comes from retained earings? b. If the company issued new stock, it would incur a 10% flotation cost. What would be the cost of equity from new stock? PROJECT SELECTION Midwest Water Works estimates that its WACC is 10.5%. The company is considering the following capital budgeting projects: 10-5 Size Rate of Return Project A B D $1 million 2 million 2 million 2 million 1 million 1 million 1 million 12.0% 11.5 11.2 11.0 10.7 10.3 10.2 E F G 10-6 Intermediate Problems 6-13 Assume that each of these projects is just as risky as the firm's existing assets and that the firm may accept all the projects or only some of them. Which set of projects should be accepted? Explain. COST OF COMMON EQUITY The future earnings, dividends, and common stock price of Callahan Technologies Inc. are expected to grow 6% per year. Callahan's common stock currently sells for $22.00 per share; its last dividend was $2.00; and it will pay a $2.12 dividend at the end of the current year. a. Using the DCF approach, what is its cost of common equity? b. If the firm's beta is 1.2, the risk-free rate is 6%, and the average return on the market is 13%, what will be the firm's cost of common equity using the CAPM approach? c. If the firm's bonds earn a return of 11%, based on the bond-yield-plus-risk-premium approach, what will be r,? Use the midpoint of the risk premium range discussed in Section 10-5 in your calculations. d. If you have equal confidence in the inputs used for the three approaches, what is your estimate of Callahan's cost of common equity? COST OF COMMON EQUITY WITH AND WITHOUT FLOTATION The Evanec Company's next expected dividend, D, is $3.18; its growth rate is 6%, and its common stock now sells for $36.00. New stock (external equity) can be sold to net $32.40 per share. a. What is Evanec's cost of retained earnings, rs? b. What is Evanec's percentage flotation cost, F? c. What is Evanec's cost of new common stock, r? COST OF COMMON EQUITY AND WACC Palencia Paints Corporation has a target capital structure of 35% debt and 65% common equity, with no preferred stock. Its before-tax cost of debt is 8%, and its marginal tax rate is 40%. The current stock price is Po $22.00. The last dividend was D. - $2.25, and it is expected to grow at a 5% constant rate. What is its cost of common equity and its WACC? WACC The Paulson Company's year end balance sheet is shown below. Its cost of common equity is 14%, its before-tax cost of debt is 10%, and its marginal tax rate is 40%. Assume that the firm's long-term debt sells at par value. The firm's total debt, which is the sum of the company's short-term debt and long-term debt, equals $1,167. The firm has 10-7 10-8 10-9