If preferred stock price P_p = $47.50, dividend D_p = $3.80, what's the required rate of return r_p?

10-3For Company XYZ, if 40% of its funding comes from Debt; 60% from Common equity; cost of debt r_d = 9%; Tax T = 40%; WACC = 9.96%; what's the required rate of return for equity investor r_s ?

10-4For Company ABC, if stock price P₀ = $30; dividend paid at the end of period 1 D₁ = $3.00; growth rate g = 5%;

a.What's the required rate of return for equity holder rs = ?

b.If the flotation cost F = 10%; What's the required rate of return for equity holder rs = ?

10-5If the risk free rate or return rRF = 9%, market average return rM = 13%, beta b = 1.6, what's the required rate of return for equity capital, using CAPM model?

10-6If a firm's bond rate is 12%, the risk premium is estimated as 4%, what's the required rate of return for equity capital rs?

10-7Questions 10-4 (a), 10-5, and 10-6 represent three approaches to calculate required rate of return for equity capital, if you have equal confidence for all three approaches, what's the average required rate of return for equity capital?

10-8

Probable Effect on

r_d(1 - T)r_sWACC

a.The corporate tax rate is lowered.

b.The Federal Reserve tightens credit.

c.The firm uses more debt; that is, it increases

its debt/assets ratio.

d.The dividend payout ratio is increased.

e.The firm doubles the amount of capital it raises

during the year.

f.The firm expands into a risky new area.

g.The firm merges with another firm whose earnings

are counter-cyclical both to those of the first firm and

to the stock market.

h.The stock market falls drastically, and the firm's stock

falls along with the rest.

i.Investors become more risk averse.

j.The firm is an electric utility with a large investment in

nuclear plants.Several states propose a ban on

nuclear power generation.