3. a

The Drogon Co. just issued a dividend of $2.36 per share on its common stock. The company is expected to maintain a constant 6 percent growth rate in its dividends indefinitely. If the stock sells for $55 a share, what is the company's cost of equity?

rev: 09_20_2012

Multiple Choice

• 11.08%

• 10.55%

• 10.02%

• 10.29%

• 4.66%

3b.

Dinklage Corp. has 9 million shares of common stock outstanding. The current share price is $88, and the book value per share is $7. The company also has two bond issues outstanding. The first bond issue has a face value of $80 million, has a 5 percent coupon, and sells for 98 percent of par. The second issue has a face value of $55 million, has a 6 percent coupon, and sells for 106 percent of par. The first issue matures in 20 years, the second in 8 years.

The most recent dividend was $6 and the dividend growth rate is 8 percent. Assume that the overall cost of debt is the weighted average of that implied by the two outstanding debt issues. Both bonds make semiannual payments. The tax rate is 38 percent.

What is the company's WACC?

Multiple Choice

• 13.57%

• 5.16%

• 5.08%

• 10.24%

• 5.12%