1:

Torch Industries can issue perpetual preferred stock at a price of $68.50 a share. The stock would pay a constant annual dividend of $5.50 a share. What is the company's cost of preferred stock, r_p? Round your answer to two decimal places.

2:

Pearson Motors has a target capital structure of 35% debt and 65% common equity, with no preferred stock. The yield to maturity on the company's outstanding bonds is 9%, and its tax rate is 25%. Pearson's CFO estimates that the company's WACC is 11.20%. What is Pearson's cost of common equity? Do not round intermediate calculations. Round your answer to two decimal places.

3:

Jarett & Sons's common stock currently trades at $29.00 a share. It is expected to pay an annual dividend of $1.00 a share at the end of the year (D₁ = $1.00), and the constant growth rate is 3% a year.

1. What is the company's cost of common equity if all of its equity comes from retained earnings? Do not round intermediate calculations. Round your answer to two decimal places.

2. If the company issued new stock, it would incur a 12% flotation cost. What would be the cost of equity from new stock? Do not round intermediate calculations. Round your answer to two decimal places.

4:

Midwest Water Works estimates that its WACC is 10.55%. The company is considering the following capital budgeting projects.

Assume that each of these projects is just as risky as the firm's existing assets and that the firm may accept all the projects or only some of them. Which set of projects should be accepted?

Project	Size	Rate of Return
A	$1 million	12.0%	Accept Don't accept
B	2 million	11.5	Accept Don't accept
C	2 million	11.2	Accept Don't accept
D	2 million	11.0	Accept Don't accept
E	1 million	10.7	Accept Don't accept
F	1 million	10.3	Accept Don't accept
G	1 million	10.2	Accept Don't accept

5:

Empire Electric Company (EEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of r_d = 9% as long as it finances at its target capital structure, which calls for 30% debt and 70% common equity. Its last dividend (D₀) was $2.30, its expected constant growth rate is 3%, and its common stock sells for $24. EEC's tax rate is 25%. Two projects are available: Project A has a rate of return of 15%, and Project B's return is 11%. These two projects are equally risky and about as risky as the firm's existing assets.

1. What is its cost of common equity? Do not round intermediate calculations. Round your answer to two decimal places.

   %

2. What is the WACC? Do not round intermediate calculations. Round your answer to two decimal places.

   %

3. Which projects should Empire accept?

   Project A or Project B

6:

Travis Industries plans to issue perpetual preferred stock with an $11.00 dividend. The stock is currently selling for $107.00, but flotation costs will be 8% of the market price, so the net price will be $98.44 per share. What is the cost of the preferred stock, including flotation? Round your answer to two decimal places.

7:

Sidman Products's common stock currently sells for $49 a share. The firm is expected to earn $4.41 per share this year and to pay a year-end dividend of $2.80, and it finances only with common equity.

1. If investors require a 9% return, what is the expected growth rate? Do not round intermediate calculations. Round your answer to two decimal places.

   %

2. If Sidman reinvests retained earnings in projects whose average return is equal to the stock's expected rate of return, what will be next year's EPS? (Hint: g = (1 Payout ratio)ROE). Do not round intermediate calculations. Round your answer to the nearest cent.

   $ per share

8:

Adamson Corporation is considering four average-risk projects with the following costs and rates of return:

Project	Cost		Expected Rate of Return
1	$2,000		16.00%
2	3,000		15.00
3	5,000		13.75
4	2,000		12.50

The company estimates that it can issue debt at a rate of r_d = 10%, and its tax rate is 25%. It can issue preferred stock that pays a constant dividend of $6.00 per year at $57.00 per share. Also, its common stock currently sells for $49.00 per share; the next expected dividend, D₁, is $4.75; and the dividend is expected to grow at a constant rate of 7% per year. The target capital structure consists of 75% common stock, 15% debt, and 10% preferred stock.

1. What is the cost of each of the capital components? Do not round intermediate calculations. Round your answers to two decimal places.

   Cost of debt: %

   Cost of preferred stock: %

   Cost of retained earnings: %

2. What is Adamson's WACC? Do not round intermediate calculations. Round your answer to two decimal places.

   %

9:

The following table gives Foust Company's earnings per share for the last 10 years. The common stock, 8.2 million shares outstanding, is now (1/1/20) selling for $52.00 per share. The expected dividend at the end of the current year (12/31/20) is 40% of the 2019 EPS. Because investors expect past trends to continue, g may be based on the historical earnings growth rate. (Note that 9 years of growth are reflected in the 10 years of data.)

Year	EPS		Year	EPS
2010	$3.90		2015	$5.73
2011	4.21		2016	6.19
2012	4.55		2017	6.68
2013	4.91		2018	7.22
2014	5.31		2019	7.80

The current interest rate on new debt is 11%; Foust's marginal tax rate is 25%; and its target capital structure is 55% debt and 45% equity.

1. Calculate Foust's after-tax cost of debt. Round your answer to two decimal places.

   %

   Calculate Foust's cost of common equity. Calculate the cost of equity as r_s = D₁/P₀ + g. Do not round intermediate calculations. Round your answer to two decimal places.

   %

2. Find Foust's WACC. Do not round intermediate calculations. Round your answer to two decimal places.

   %