Please note there are 4 questions to answer, must answer all 3 to get all the po
ID: 2701220 • Letter: P
Question
Please note there are 4 questions to answer, must answer all 3 to get all the points. thanks
Round your answer to 2 decimal places, XX.XX%, i.e., 12.34% or 0.12% or 12.30%. Clearly identify your answer. Show how you computed your answer
1.
LePage LLC,expects to earn $2.50 per share during the current year, its expected payout ratio is 55%, its expected constant dividend growth rate is 6.0%, and its common stock currently sells for $22.50 per share. New stock can be sold to the public at the current price, but a flotation cost of 5% would be incurred. What would be the cost of equity from new common stock?
2.
Oak Company%u2019s perpetual preferred stock sells for $102.50 per share, and it pays a $9.50 annual dividend. If the company were to sell a new preferred issue, it would incur a flotation cost of 4.00% of the price paid by investors. What is the company's cost of preferred stock for use in calculating the WACC?
3.
You were hired as a consultant to Quiggs Company, whose target capital structure is 40% debt, 10% preferred, and 50% common equity. The interest rate on new debt is 6.50%, the yield on the preferred is 6.00%, the cost of retained earnings is 12.25%, and the tax rate is 40%. The firm will not be issuing any new stock. What is Quigley's WACC?
4.
Scan Inc.'s CFO hired you as a consultant to help her estimate the cost of capital. You have been provided with the following data: rRF = 5.00%; RPM = 6.00%; and b = 0.90. Based on the CAPM approach, what is the cost of equity from retained earnings?
Explanation / Answer
1. cost of equity=[D/price]+growth
= 2.5*(.55)*(1+.06)/22.5*(1-.05) + .06 = 12.82%
2. cost of preffered stock=div./net proceeds
net proceeds= price- floatation cost=102.5-(102.5*4%)=
98.5
=9.5/98.5=0.0964 or 9.64%
3.WACC =int. rate*debt(1-t)+preffered*yeild+equity*cost of retained earning
.40*6.5*(1-.40) + .10*(6) + .50*(12.25) = 8.29%
4.Cost of Equity =risk free +market risk premium*beta
4 + .9*(6) = 9.4%