Problem 1. Tunney Industries can issue perpetual preferred stock at a price of $50 a share.
The issue is expected to pay a constant annual dividend of $3.80 a share. The flotation cost on the issue is estimated to be 5 percent.
What is the company's cost of preferred stock, rps?
Problem 2. The Bouchard Company's current EPS is $6.50. It was $4.42 5 years. The company pays out 40 percent of it's earnings as dividends, and the stock sells for $36.
a. Calculate the past growth rate in earnings.
b. Calculate the next expected dividend per share, D1. (D0=0.4($6.50)=$2.60.) Assume that the past growth rate will continue.
c. What is the cost of equity, rs, for the Bouchard Company?