1. Burnwood Tech plans to issue some $60 par preferred stock with a 5% dividend. A similar stock is selling on the market for $56. Burnwood must pay flotation costs of 5% of the issue price. What is the cost of the preferred stock? Round your answer to two decimal places.

2. Booher Book Stores has a beta of 1.2. The yield on a 3-month T-bill is 3.5% and the yield on a 10-year T-bond is 6%. The market risk premium is 5%. What is the estimated cost of common equity using the CAPM? Round your answer to two decimal places.

3. The earnings, dividends, and common stock price of Shelby Inc. are expected to grow at 4% per year in the future. Shelby's common stock sells for $26.75 per share, its last dividend was $1.50, and the company will pay a dividend of $1.56 at the end of the current year.

a Using the discounted cash flow approach, what is its cost of equity? Round your answer to two decimal places.

b If the firm's beta is 2.1, the risk-free rate is 6%, and the expected return on the market is 14%, then what would be the firm's cost of equity based on the CAPM approach? Round your answer to two decimal places.

c If the firm's bonds earn a return of 8%, and analysts estimate the market risk premium is 3 to 5 percent, then what would be your estimate of rs using the over-own-bond-yield-plus-judgmental-risk-premium approach? Round your answer to two decimal places. (Hint: Use the midpoint of the risk premium range).

d On the basis of the results of parts a through c, what would be your estimate of Shelby's cost of equity? Assume Shelby values each approach equally. Round your answer to two decimal places.

4. Radon Homes's current EPS is $7.53. It was $3.83 5 years ago. The company pays out 50% of its earnings as dividends, and the stock sells for $38. Calculate the historical growth rate in earnings. (Hint: This is a 5-year growth period.) Round your answer to two decimal places. Calculate the next expected dividend per share, D1 (Hint: D0 = 0.50($7.53) = $3.77). Assume that the past growth rate will continue. Round your answer to the nearest cent. What is Radon's cost of equity, rs? Round your answer to two decimal places.

5. Spencer Supplies's stock is currently selling for $60 a share. The firm is expected to earn $5.10 per share this year and to pay a year-end dividend of $3.00. If investors require a 8.5% return, what rate of growth must be expected for Spencer? Round your answer to two decimal places. If Spencer reinvests earnings in projects with average returns equal to the stock's expected rate of return, then what will be next year's EPS? (Hint: g = ROE Retention ratio.) Round your answer to the nearest cent.

6. Messman Manufacturing will issue common stock to the public for $30. The expected dividend and growth in dividends are $2.00 per share and 5%, respectively. If the flotation cost is 11% of the issue's gross proceeds, what is the cost of external equity, re? Round your answer to two decimal places.

7. Suppose a company will issue new 20-year debt with a par value of $1,000 and a coupon rate of 9%, paid annually. The tax rate is 40%. If the flotation cost is 2% of the issue proceeds, then what is the after-tax cost of debt? Disregard the tax shield from the amortization of flotation costs. Round your answer to two decimal places.

8. On January 1, the total market value of the Tysseland Company was $60 million. During the year, the company plans to raise and invest $30 million in new projects. The firm's present market value capital structure, shown below, is considered to be optimal. Assume that there is no short-term debt. Debt $30,000,000 Common equity 30,000,000 Total capital $60,000,000 New bonds will have an 7% coupon rate, and they will be sold at par. Common stock is currently selling at $30 a share. The stockholders' required rate of return is estimated to be 12%, consisting of a dividend yield of 4% and an expected constant growth rate of 8%. (The next expected dividend is $1.20, so $1.20/$30 = 4%.) The marginal corporate tax rate is 30%. In order to maintain the present capital structure, how much of the new investment must be financed by common equity? Enter your answer in dollars. For example, $1.2 million should be entered as $1200000. Assuming there is sufficient cash flow such that Tysseland can maintain its target capital structure without issuing additional shares of equity, what is its WACC? Round your answer to two decimal places.

9. Market Value Capital Structure Suppose the Schoof Company has this book value balance sheet: Current assets $30,000,000 Current liabilities $10,000,000 Fixed assets 50,000,000 Long-term debt 30,000,000 Common stock (1 million shares) 1,000,000 Retained earnings 39,000,000 Total assets $80,000,000 Total claims $80,000,000 The current liabilities consist entirely of notes payable to banks, and the interest rate on this debt is 11%, the same as the rate on new bank loans. These bank loans are not used for seasonal financing but instead are part of the company's permanent capital structure. The long-term debt consists of 30,000 bonds, each with a par value of $1,000, an annual coupon interest rate of 9%, and a 20-year maturity. The going rate of interest on new long-term debt, rd, is 11%, and this is the present yield to maturity on the bonds. The common stock sells at a price of $62 per share. Calculate the firm's market value capital structure. Round your answers to two decimal places.

Short Term Debt $ %

Long term Debt $ %

Common Equity $ %

Total Capital $ %