1. The future earnings, dividends, and common stock price of Callahan Technologies Inc. are expected to grow 6% per year. Callahan's common stock currently sells for $30.00 per share; its last dividend was $2.50; and it will pay a $2.65 dividend at the end of the current year.

a. Using the DCF approach, what is its cost of common equity? Do not round intermediate calculations. Round your answer to two decimal places.

%

b. If the firm's beta is 2.1, the risk-free rate is 8%, and the average return on the market is 13%, what will be the firm's cost of common equity using the CAPM approach? Round your answer to two decimal places.

%

c. If the firm's bonds earn a return of 12%, based on the bond-yield-plus-risk-premium approach, what will be r_s? Use the judgmental risk premium of 4% in your calculations. Round your answer to two decimal places.

%

d. If you have equal confidence in the inputs used for the three approaches, what is your estimate of Callahan's cost of common equity? Do not round intermediate calculations. Round your answer to two decimal places.

%

2. Palencia Paints Corporation has a target capital structure of 35% debt and 65% common equity, with no preferred stock. Its before-tax cost of debt is 12%, and its marginal tax rate is 25%. The current stock price is P₀ = $21.50. The last dividend was D₀ = $2.00, and it is expected to grow at a 6% constant rate. What is its cost of common equity and its WACC? Do not round intermediate calculations. Round your answers to two decimal places.

r_s = %

WACC = %