Cabelas Inc is a retail sporting goods chain traded on NYSE specializing in fishing, hunting and other outdoor sports gear. Suppose the President has asked for your help in determining the companys cost of debt and cost of equity capital. Show your work

a) The stock currently sells for $63 per share and the dividend per share this year will be $5. The President claims that it will cost $5 per share to use the stockholders money this year, so the cost of equity is 7.9% ($5/$63). Why is the President right or wrong?

b) Based on the companys recent financial statements, total liabilities are $8million. Total interest expense due at the end of this year is $1million. The President claims that since the company will pay $1million interest on a debt of $8million, then the cost of debt is 12.5% ($1mill/$8mill). Why is the President right or wrong?