1. Moorhead industries’ common stock is currently trading at $80 a share. The stock is expected to pay a dividend of $4/share at the end of the year and the dividend is expected to grow at a constant rate of 6% a year. What is the cost of common equity?
2. Moorhead industries’ has a target capital structure of 35 percent debt, 20 percent preferred stock, and 45 percent common equity. It has a before-tax cost of debt of 8%, and its marginal tax rate is 22%. Using this information and the value calculated in question #5 and a cost of preferred stock of 2.5%, calculate the WACC.
3. Johnson Farms before-tax cost of debt is 7% and its marginal tax rate is 32%. The current stock price is $70/share. The expected dividend is $3/share. The dividend is expected to grow at a constant rate of 8%. What will be the firm’s cost of common equity and its WACC when the firm’s target capital structure is 40% debt and 60% common equity?