Eaton Electronic Companys treasurer uses both the capital asset pricing model and the dividend valuation model to compute the cost of common equity (also referred to as the required rate of return for common equity).

Assume:

RF= 8%

Km= 12%

=1.4

D1= $0.55

P0= $18

g=7%

a. Compute Ki (required rate of return on common equity based on the capital asset pricing model). (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

ki________%

b. Compute Ke (required rate of return on common equity based on the dividend valuation model). (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

Ke________%

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The treasurer of Riley Coal Co. is asked to compute the cost of fixed income securities for her corporation. Even before making the calculations, she assumes the aftertax cost of debt is at least 2 percent less than that for preferred stock. Debt can be issued at a yield of 13.6 percent, and the corporate tax rate is 25 percent. Preferred stock will be priced at $51 and pay a dividend of $5.80. The flotation cost on the preferred stock is $2.

a. Compute the aftertax cost of debt. (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

Aftertax cost of debt ________%

b. Compute the aftertax cost of preferred stock. (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

Aftertax cost of preferred stock __________%

c. Based on the facts given above, is the treasurer correct?

Yes or No