1. (Cost of common equity) Falon Corporation is issuing new common stock at a market price of $27.32. Dividends last year were $1.39 and are expected to grow at an annual rate of 7.4 percent forever. What is Falon's cost of common equity capital?

2. (Cost of common equity) The common stock for the Hetterbrand Corporation sells for $59.17, and the last dividend paid was $2.24. Five years ago the firm paid $1.84 per share, and dividends are expected to grow at the same annual rate in the figure as they did over the past five years.

a. What is the estimated cost of common equity to the firm using the dividend growth model? (Round to two decimal places.)

b. Hetterbrand's CFO has asked his financial analyst to estimate the firm's cost of common equity using the CAPM as a way of validating the earlier calculations. The risk-free rate of interest is currently 4.1 percent, the market risk premium is estimated to be 5.2 percent, and Hetterbrand's beta is 0.78.

What is your estimate of the firm's cost of common equity using this method? (Round to two decimal places.)

(Capital structure weights) In August of 2009 the capital structure of the Emerson Electric Corporation (EMIR) (measured in book and market values) appeared as follows:

1. What weights should Emerson use when computing the firm's weighted average cost of capital?
2. What is the appropriate weight of debt? (Round to one decimal place.)
3. What is the appropriate weight of common equity? (Round to one decimal place.)