FOUR Risk and the Required Rate of Return

Common stock The firm's common stock is currently selling for $30$ per share. The

stock has paid a dividend that has gradually increased for many years, rising from

$1\mathrm{.}35$ ten years ago to the $2$ dividend that the company just recently paid. If the

company wants to issue new common shares, it will sell them for $29\mathrm{.}25$ per share

to attract investors, and the company will pay $1$ per share in flotation costs.

Preferred Stock A $10\%($annual dividend$)$ preferred stock having a par value of

$100$ can be sold for $97.$ An additional fee of $1$ per share must be paid to the

underwriters.

a$.$ Calculate the after$-$tax cost of debt.

b$.$ Calculate the cost of preferred stock.

c$.$ Calculate the cost of common stock $($both retained earnings and new common stock$).$

d$.$ Using the values calculated in parts $a,b,$ and $c,$ calculate the WACC for Parry

Instruments.

Personal Finance Problem

P$9-22$ Weighted average cost of capital $($WACC$)$ Mandy Robertson has just bought a new

house and wants to consolidate her finances. She has three loans outstanding. They

all mature in five years, and she can repay them without penalty any time before

maturity. The following table shows the amounts owed on each loan and the annual

interest rate associated with each loan.