CHAP 9 PROBLEM SET

CHAP 9 PROBLEM SET - Cost of Capital Problem Set Additional...

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Cost of Capital Problem Set Additional problems 1 . You were hired as a consultant to Giambono Company, whose target capital structure is 40% debt, 15% preferred, and 45% common equity. The after-tax cost of debt is 6.00%, the cost of preferred is 7.50%, and the cost of retained earnings is 12.75%. The firm will not be issuing any new stock. What is its WACC? 9.26% 2 . To help finance a major expansion, Castro Chemical Company sold a noncallable bond several years ago that now has 20 years to maturity. This bond has a 9.25% annual coupon, paid semiannually, sells at a price of $1,075, and has a par value of $1,000. If the firm's tax rate is 40%, what is the component cost of debt for use in the WACC calculation? 5.08% 3 . Assume that Kish Inc. hired you as a consultant to help estimate its cost of capital. You have obtained the following data: D 0 = $0.90; P 0 = $27.50; and g = 7.00% (constant). Based on the DCF approach, what is the cost of equity from retained earnings? 10.5% 4 . Trahan Lumber Company hired you to help estimate its cost of capital. You obtained the following data: D 1 = $1.25; P 0 = $27.50; g = 5.00% (constant); and F = 6.00%. What is the cost of equity raised by selling new common stock? 9.84% 5 . Weaver Chocolate Co. expects to earn $3.50 per share during the current year, its expected dividend payout ratio is 65%, its expected constant dividend growth rate is 6.0%, and its common stock currently
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