1. Hitchcock Snacks will issue common stock to the public for $40. The expected dividend next year is $2.00 per share and will grow at 6% thereafter. If the flotation cost is 10% of the issue's gross proceeds, what is the cost of external equity?
2. Holt Caps Company has $20M in common equity and $5M in debt (and no preferred stock). Its recently issued bonds have a 6% coupon rate and are currently selling at par. The company's marginal tax rate is 40%. The stockholders' required rate of return is estimated to be 10%. What is Holt's WACC?
3. The stock price of Gina's Dance Studios, Inc., is $20 and the stock just paid a dividend of $1.20. The dividends are expected to grow at 6% per year in the future.
a. Using the discounted cash flow approach, what is its cost of equity?
b. If the firm's beta is 1.4, the risk-free rate is 3%, and the expected return on the market is 9.4%, then what would be the firm's cost of equity based on the CAPM?
c. On the basis of the results of Parts a and b, what would be your estimate of Gina's cost of equity?