1. Calculating Cost of Equity 1.01] The Absolute Zero Co. just issued a dividend of $3.40 per share on its common stock. The company is expected to maintain a constant 4.5 percent growth rate in its dividends indefinitely. If the stock sells for $53 a share, what is the company's cost of equity?
2. Calculating Cost of Equity 11011 The Gcaber Corporation's common stock has a beta of 1.15. If the risk-free rate is 3.5 percent and the expected return on the market is 11 percent, what is the company's cost of equity capital?
3. Calculating Cost of Equity [101] Stock in Daenerys Industries has a beta of .95. The market risk premium is 7 percent, and T-bills are currently yielding 3.6 percent. The company's most recent dividend was $2.05 per share, and dividends are expected to grow at an annual rate of 4.1 percent indefinitely. If the stock sells for $39 per share, what is your best estimate of the company's cost of equity?
4. Estimating the DCF Growth Rate [L01] Suppose Stark, Ltd., just issued a divi-dend of $2.08 per share on its common stock. The company paid dividends of $1.71, $1.82, $1.93, and $1.99 per share in the last four years. If the stock currently sells for $45, what is your best estimate of the company's cost of equity capital using the arithmetic average growth rate in dividends? What if you use the geometric average growth rate?
7. Calculating Cost of Debt [102] Jiminy's Cricket Farm issued a 30-year, 7 percent semiannual bond 3 years ago. The bond currently sells for 93 percent of its face value. The company's tax rate is 35 percent.
a. What is the pretax cost of debt?
b. What is the aftertax cost of debt?
c. Which is more relevant, the pretax or the aftertax cost of debt? Why?
& Calculating Cost of Debt [L02] For the firm in Problem 7, suppose the book value of the debt issue is $85 million. In addition, the company has a second debt issue on the market, a zero coupon bond with 12 years left to maturity; the book value of this issue is 35 million, and the bonds sell for 59 percent of par. What is the company's total book value of debt? The total market value? What is your best estimate of the aftertax cost of debt now?
9. Calculating WACC [L03] Mullineaux Corporation has a target capital structure of 70 pen ent common stock, 5 percent preferred stock, and 25 percent debt. Its cost of equity is II percent, the cost of preferred stock is 5 percent, and the pretax cost of debt is 7 percent. The relevant tax rate is 35 percent.
a. What is Mullineaux's WACC?
h. The company president has approached you about Mullineaux's capital structure. He wants to know why the company doesn't use more preferred stock financing because it costs less than debt. What would you tell the president?
10. Taxes and WACC [103] Lannister Manufacturing has a target debt-equity ratio of .35. Its cost of equity is 12 percent, and its cost of debt is 6 percent. If the tax rate is 35 percent, what is the company's WACC?
1 L Finding the Target Capital Structure 11031 Farna's Llamas has a weighted aver¬age cost of capital of 8.5 percent. The company's cost of equity is 11 percent, and its pretax cost of debt is 6.1 percent. The tax rate is 35 percent. What is the company's target debt-equity ratio?
20. WACC and NP V [L03, 51 Scanlin, Inc., is considering a project that will result INTER in initial aftertax cash savings of $2.1 million at the end of the first year, and these (Quest savings will grow at a rate of 2 percent per year indefinitely. The firm has a target debt-equity ratio of .80, a cost of equity of 11 percent, and an aftertax cost of debt of 4.6 percent.
The cost-saving proposal is somewhat riskier than the usual project the firm undertakes; management uses the subjective approach and applies an adjust¬ment factor of +3 percent to the cost of capital for such risky projects. Under what circumstances should the company take on the project?
24. Adjusted Cash flow from Assets [1031 Ward Corp. is expected to have an EBIT of $1.9 million next year. Depreciation, the increase in net working capital, and cap¬ital spending are expected to be S165,000, $85,000, and 5115,000, respectively.
All are expected to grow at 18 percent per year for four years. The company currently has S13 million in debt and 800,000 shares outstanding. After Year 5, the adjusted cash flow from assets is expected to grow at 3 percent indefinitely. The company's WACC is 8.5 percent and the tax rate is 35 percent. What is the price per share of the company's stock?