a$.$ Ryane Inc. has perpetual preferred stock outstanding that sells for $$30$ a share and pays tion Three $-$ Cost of Capital $(20$ marks$)$

Lily's Company currently outstanding bonds have a $9\%$ coupon and a $13\%$ yield to

maturity. Holmes believes it could issue new bonds at par that would provide a similar

yield to maturity. If its marginal tax rate is $32\%,$ what is Lily's after$-$tax cost of debt?

Diamond Industries can issue perpetual preferred stock at a price of $$80\mathrm{.}00$ a share.

The stock would pay a constant annual dividend of $$7\mathrm{.}00$ a share. What is the

company's cost of preferred stock?

c$.$ Bailey Electric Company $($BEC$)$ uses only debt and common equity. It can borrow

unlimited amounts at an interest rate of rd $=9\%$ as long as it finances at its target

capital structure, which calls for $35\%$ debt and $65\%$ common equity. Its last dividend

was $$2\mathrm{.}20,$ its expected constant growth rate is $6\%,$ and its common stock sells for $$26.$

BEC's tax rate is $25\%.$

i$.$ What is the cost of common equity?

ii$.$ What is BEC's WACC?

Veronica UC has an $12\%$ WACC and is considering two mutually exclusive investments with the

following cash flows:

a dividend of $$2\mathrm{.}75$ at the end of each year. What is the required rate of return?

b$.$ FINC $3300$ Enterprises recently paid a dividend of $$3\mathrm{.}75.$ It expects to have a

nonconstant growth rate of $18\%$ for the first two years then $10\%$ in the third year. In

the $4^{th}$ year, the growth rate remains constant at $6\%$ thereafter. What is the firm's

intrinsic value today, Po$?$

c$.$ Nixon Brothers is expected to pay a $$1\mathrm{.}80$ per share dividend at the end of the year. The

dividend is expected to grow at a constant rate of $4\%$ a year. The required rate of

return on the stock is $10\%.$ What is the stock's current value per share?

i$.$ Find the dividend yield and the capital gains for this stock.

Question Three $-$ Cost of Capital $(20$ marks$)$

a$.$ Lily's Company currently outstanding bonds have a $9\%$ coupon and a $13\%$ yield to

maturity. Holmes believes it could issue new bonds at par that would provide a similar

yield to maturity. If its marginal tax rate is $32\%,$ what is Lily's after$-$tax cost of debt?

b$.$ Diamond Industries can issue perpetual preferred stock at a price of $$80\mathrm{.}00$ a share.

The stock would pay a constant annual dividend of $$7\mathrm{.}00$ a share. What is the

company's cost of preferred stock?

c$.$ Bailey Electric Company $($BEC$)$ uses only debt and common equity. It can borrow