An analyst gathered the following information about National Home Rentals $($NHR$)$ Inc. and

market. The market portfolio has an $11$ percent rate of return and market risk premium of $7\mathrm{.}5$

percent. Corporate tax rate is $37$ percent.

On January $12020,$ NHR has $220,000$ shares of common stock outstanding at a market price

of $$30$ per share and with a beta of $1\mathrm{.}73.$ It has just paid a $$2\mathrm{.}25$ dividend per share on

December $312019.$ The firm's dividends are expected to grow at a rate of $7\%$ per year

thereafter.

NHR also has $15,000$ shares of preferred stock outstanding with a $$14$ per share fixed dividend.

The preferred stocks are just sold for $$105$ per share for a par value of $$100.$

NHR$\text{'}$s bond issue has a face value of $$4$ million and issued three years ago with an annual

coupon rate of $9$ percent maturing on January $12027.$ Each bond is currently trading at a price

of $$930$ for a face value of $$1000.$

$($a$)$ What is the best estimate for NHR$\text{'}$s cost of equity?

$($b$)$ What is NHR$\text{'}$s WACC?

$(3$ marks$)$

$(7$ marks$)$

$($c$)$ Discuss the underlying assumptions when using the WACC as the discount rate to

evaluate the cash flows from a new project in investment appraisal.

$($d$)$ Discuss the influence of agency problem on capital structure decision.

$(7$ marks$)$

$(8$ marks$)$