1. Fama's Llamas has a weighted average cost of capital of 10.5 percent. The company's cost of equity is 16.5 percent, and its pretax cost of debt is 8 percent. The tax rate is 33 percent. What is the company's target debt-equity ratio?
2. The CFO, has asked you to estimate the company’s cost of equity. You decide to use the dividend growth model approach to do this. You know that y our company stock current trades at $17.50 per share and that its most recent annual dividend was $1. Analysts’ estimate that the company can grow its earnings 5% over the long run. Given this information, what do you estimate the first cost of equity to be?