The Down and Out Co. just issued a dividend of $2.21 per share on its common stock. The
company is expected to maintain a constant 6 percent growth rate in its dividends indefinitely. If
the stock sells for $60 a share, the company's cost of equity is percent.
(Do not include the
percent sign (%). Round your answer to 2 decimal places. (e.g., 32.16))
Explanation:
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
= [$2.21(1.060)/$60] + 0.060 = 0.0990 or 9.90%
Waller, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 11
years to maturity that is quoted at 105 percent of face value. The issue makes semiannual
payments and has an embedded cost of 6 percent annually. Company's pretax cost of debt is
percent. If the tax rate is 34 percent, the aftertax cost of debt is percent.
(Do not include the
percent signs (%). Round your answers to 2 decimal places. (e.g., 32.16))
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 Spring '09
 Dividends, Zerocoupon bond, Jiminy

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