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ch.15 solution

# ch.15 solution - 1 With the information given we can find...

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1. With the information given, we can find the cost of equity using the dividend growth model. Using this model, the cost of equity is: R E = [\$2.60(1.06)/\$60] + .06 = .1059 or 10.59% 2. Here we have information to calculate the cost of equity using the CAPM. The cost of equity is: R E = .045 + 1.20(.13 .045) = .1470 or 14.70% 5. The cost of preferred stock is the dividend payment divided by the price, so: R P = \$5/\$87 = .0575 or 5.75% 6. The pretax cost of debt is the YTM of the company’s bonds, so: P 0 = \$940 = \$35(PVIFA R%,24 ) + \$1,000(PVIF R%,24 ) R = 3.889% YTM = 2 × 3.889% = 7.78% And the aftertax cost of debt is: R D = .0778(1 .35) = .0506 or 5.06%

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7. a. The pretax cost of debt is the YTM of the company’s bonds, so: P 0 = \$1,080 = \$45(PVIFA R%,46 ) + \$1,000(PVIF R%,46 ) R = 4.11% YTM = 2 × 4.11% = 8.22% b. The aftertax cost of debt is: R D = .0822(1 .35) = .0534 or 5.34% c. The after-tax rate is more relevant because that is the actual cost to the company. 10. Here we need to use the debt-equity ratio to calculate the WACC. Doing so, we find: WACC = .17(1/1.80) + .10(.80/1.80)(1 .35) = .1233 or 12.33% 11. Here we have the WACC and need to find the debt-equity ratio of the company. Setting up the
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