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1 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 beforetax cost of debt is 12% and its marginal tax rate is 40%. The current stock price is P_{0} = $22.00. The last dividend was D_{0} = $3.50, and it is expected to grow at a 6% constant rate. What is its cost of common equity and its WACC? Round your answers to two decimal places.
a. r_{s} = ________ %
b. WACC = ________ %
2. WACC and Percentage of Debt Financing
Hook Industries' capital structure consists solely of debt and common equity. It can issue debt at r_{d} = 8%, and its common stock currently pays a $2.50 dividend per share (D_{0} = $2.50). The stock's price is currently $27.25, its dividend is expected to grow at a constant rate of 6% per year, its tax rate is 35%, and its WACC is 12.55%. What percentage of the company's capital structure consists of debt? Round your answer to two decimal places.
________ %
3. WACC and optimal capital budget
Adams Corporation is considering four averagerisk projects with the following costs and rates of return:
Project 
Cost 
Expected Rate of Return 
1 
$2,000 
16.00% 
2 
3,000 
15.00 
3 
5,000 
13.75 
4 
2,000 
12.50 
The company estimates that it can issue debt at a rate of r_{d} = 9%, and its tax rate is 40%. It can issue preferred stock that pays a constant dividend of $4 per year at $55 per share. Also, its common stock currently sells for $40 per share; the next expected dividend, D_{1}, is $5.00; and the dividend is expected to grow at a constant rate of 4% per year. The target capital structure consists of 75% common stock, 15% debt, and 10% preferred stock.
a. What is the cost of each of the capital components? Round your answers to two decimal places.
Cost of debt ________ %
Cost of preferred stock ________ %
Cost of retained earnings ________ %
b. What is Adams' WACC? Round your answer to two decimal places.
________ %
c. Only projects with expected returns that exceed WACC will be accepted. Which projects should Adams accept?
Project 1 
_________________ 
Project 2 
_________________ 
Project 3 
_________________ 
Project 4 
_________________ 
4. WACC and Cost of Common Equity
Kahn Inc. has a target capital structure of 60% common equity and 40% debt to fund its $12 billion in operating assets. Furthermore, Kahn Inc. has a WACC of 15%, a beforetax cost of debt of 11%, and a tax rate of 40%. The company's retained earnings are adequate to provide the common equity portion of its capital budget. Its expected dividend next year (D_{1}) is $3 and the current stock price is $21.
a. What is the company's expected growth rate? Round your answer to two decimal places at the end of the calculations.
________ %
b. If the firm's net income is expected to be $1.4 billion, what portion of its net income is the firm expected to pay out as dividends? (Hint: Refer to Equation below.)
Growth rate = (1  Payout ratio)ROE
Round your answer to two decimal places at the end of the calculations.
________ %
5. Cost of Equity with and without Flotation
Javits & Sons' common stock currently trades at $23.00 a share. It is expected to pay an annual dividend of $1.00 a share at the end of the year (D_{1} = $1.00), 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? Round your answer to two decimal places.
________ %
b. If the company were to issue new stock, it would incur a 17% flotation cost. What would the cost of equity from new stock be? Round your answer to two decimal places.
________ %
6. 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 $98.50; but flotation costs will be 7% of the market price, so the net price will be $91.61 per share. What is the cost of the preferred stock, including flotation? Round your answer to two decimal places.
________
7. Cost of Common Equity with Flotation
Ballack Co.’s common stock currently sells for $54.75 per share. The growth rate is a constant 11.2%, and the company has an expected dividend yield of 3%. The expected longrun dividend payout ratio is 30%, and the expected return on equity (ROE) is 16%. New stock can be sold to the public at the current price, but a flotation cost of 5% would be incurred. What would be the cost of new equity? Round your answer to two decimal places.
________ %
8. WACC
Midwest Electric Company (MEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of r_{d} = 9% as long as it finances at its target capital structure, which calls for 30% debt and 70% common equity. Its last dividend (D_{0}) was $2.50, its expected constant growth rate is 5%, and its common stock sells for $28. MEC's tax rate is 40%. Two projects are available: Project A has a rate of return of 15%, while Project B's return is 11%. These two projects are equally risky and about as risky as the firm's existing assets.
a. What is its cost of common equity? Round your answer to two decimal places.
________ %
b. What is the WACC? Round your answer to two decimal places.
________ %
c. Which projects should Midwest accept?
_________________
9. WACC
The Patrick Company's yearend balance sheet is shown below. Its cost of common equity is 17%, its beforetax cost of debt is 11%, and its marginal tax rate is 40%. Assume that the firm's longterm debt sells at par value. The firm has 576 shares of common stock outstanding that sell for $4.00 per share. Calculate Patrick's WACC using market value weights. Round your answer to two decimal places.
Assets 
Liabilities And Equity 

Cash 
$ 120 

Accounts receivable 
240 

Inventories 
360 
Longterm debt 
$1,324 

Plant and equipment, net 
2,160 
Common equity 
1,556 

Total assets 
$2,880 
Total liabilities and equity 
$2,880 
________ %
10. Cost of Common Equity
Percy Motors has a target capital structure of 30% debt and 70% common equity, with no preferred stock. The yield to maturity on the company's outstanding bonds is 11%, and its tax rate is 40%. Percy's CFO estimates that the company's WACC is 15.00%. What is Percy's cost of common equity? Round your answer to two decimal places.
________ %
Subject  Business 
Due By (Pacific Time)  11/21/2013 02:00 pm 
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