1. LePage Co. expects to earn $2.00 per share during the current year, its expected payout ratio is 50%, its expected constant dividend growth rate is 5.50%, and its common stock currently sells for $31.00 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?

a.

8.90%

b.

8.73%

c.

8.23%

d.

9.40%

2. Kovach Lumber Company hired you to help estimate its cost of capital. You were provided with the following data: D₁ = $1.60; P₀ = $30.00; g = 6.50% (constant); and F = 3.00%. What is the cost of equity raised by selling new common stock?

a.

12.00%

b.

11.83%

c.

12.36%

d.

11.50%