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Chapter 10 Homework

# Chapter 10 Homework - Chapter 10 Homework 10-1 AFTER-TAX...

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Chapter 10 Homework 10-1 AFTER-TAX COST OF DEBT: The Heuser Company’s currently outstanding bonds have a 10% coupon and a 12% yield to maturity. Heuser believes it could issue new bonds at par that would provide a similar yield to maturity. If its marginal tax rate is 35%, what is Heuser’s after-tax cost of debt? 10-2 COST OF PREFERRED STOCK: Tunney Industries can issue perpetual preferred stock at a price of \$47.50 a share. The stock would pay a constant annual dividend of \$3.80 a share. What is the company’s cost of preferred stock, r p ? 10-4 COST OF EQUITY WITH AND WITHOUT FLOTATION: Javits & Sons’ common stock currently trades at \$30.00 a share. It is expected to pay an annual dividend of \$3.00 a share at the end of the year (D 1 = \$3.00), and the constant growth rate is 5% a year. a. What is the company’s cost of common equity if all of its equity comes from retained earnings? b. If the company issued new stock, it would incur a 10% flotation cost. What would be the cost of equity from new stock? 10-6 COST OF COMMON EQUITY: The future earnings, dividends, and common stock price of Carpetto Technologies Inc. are expected to grow 7% per year. Carpetto’s common stock currently sells for \$23.00 per share; its last dividend was \$2.00; and it will pay a \$2.14 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 1.6, the risk-free rate is 9%, and the average return on the market is 13%, what will be the firm’s common cost of equity using the CAPM approach? c. If the firm’s bonds earn a return of 12%, based on the bond-yield-plus-risk-premium approach, what will be r S ? 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 Carpetto’s cost of common equity?

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10-7 COST OF COMMON EQUITY WITH AND WITHOUT FLOTATION: The Evanec Company’s next expected dividend, D 1 , 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. What is Evanec’s: a. Cost of retained earnings, r S ? b. Percentage flotation cost, F? c. Cost of new common stock, r e ?
10-8 COST OF COMMON EQUITY AND WACC: Patton Paints Corporation has a target capital structure of 40% debt and 60% common equity, with no preferred stock. Its before-tax cost of debt is 12%, and its marginal tax rate is 40%. The current stock price is P 0 = \$22.50. The last dividend was D 0 = \$2.00, and it is expected to grow at a 7% constant rate. What is its cost of common equity and its WACC? 10-14 COST OF PREFERRED STOCK INCLUDING FLOTATION: Trivoli Industries plans to issue perpetual preferred stock with an \$11.00 dividend. The stock is currently selling for \$97.00; but flotation costs will be 5% of the market price, so the net price will be \$92.15 per share. What is the cost of the preferred stock, including flotation?

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Chapter 10 Homework - Chapter 10 Homework 10-1 AFTER-TAX...

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