Calculate the cost of common stock assuming no floatation cost.

i. Use the dividend discount model (DDM) under steady growth (Gordon model).

ii. Use the capital asset pricing model (CAPM).

iii. Add the mid-point of 3-5% bond-yield premium to the long-term bond yield obtained from Part 1.

0 1 2 3 WACC=? H + -100 80 50 30 Tax rate = 40% Capital structure Book value 58% Market value 30% Debt Preferred Stock Common Stock Target structure 60% 8% 32% 2% 40% 10% 60% Debt: Face value at $1,000; 10 years of maturity; 10% semiannual coupons; price $885.30; no addition cost of new debt issuance. Preferred stock: $10 annual dividend per share; price $111.10. Common stock: Price $42; dividend payout (Do) at $4 per share; steady growth of net profits expected at 5% per year Beta at 1.3; risk-free rate (rf) at 8%; market risk premium at 6% For illiquid (infrequently traded) stocks, 3-5% bond-yield risk premium is added to the long-term bond yield