2. Tresnan Brothers just paid a $1.73 per share dividend, and the dividend is expected to grow at a constant rate of 4% a year. The required rate of return on the stock , rs , is 10%. What is the stocks current value per share?

Chapter 10

3. Callahan Tech Inc.s next expected dividend, D1, is $3.18; its growth rate is 6%; and its common stock now sells for $36. New stock can be sold to net $32.40 per share. The marginal tax rate is 40%.

a) What is Callahan Techs cost of retained earnings?

b) What is Callahan Techs cost of new common stock?

c) Callahans currently outstanding bonds have an 8% coupon and a 10% yield to maturity. Callahan believes it could issue new bonds at par that would provide a similar yield to maturity. What is its after-tax cost of debt?

d) Based on the calculation above, if Callahan has a target capital structure of 35% debt and 65% common equity. What is the WACC of the firm if the firm must issue new common stock to raise additional funds?