Musical Memories, Inc. has 230,000 shares of common stock outstanding as a market price of $14 per share. The historical dividends (per share) for the firm were as follows:

2007: $1.10

2008: $1.10

2009: $1.12

2010: $1.15

2011: $1.17

2012: $1.20

Musical Memories also has 8,000 bonds outstanding that are currently selling for 102 percent of face value. The bonds carry an 8.5% coupon rate and mature in 5 years. There are also 51,000 shares of preferred stock outstanding currently selling for $38 per share with an annual dividend of $2.25, perpetually. The firms marginal tax rate is 35%.

A. What is your best estimate for the average growth rate in dividends paid to common stockholders?

a. 1.67%

b. 1.76%

c. 2.12%

d. 1.54%

e. 2.20%

B. What is your best estimate for the cost of equity?

a. 9.74%

b. 8.57%

c. 1.76%

d. 10.33%

e. 10.48%

C. What is your best estimate for the cost of debt?

a. 10.00%

b. 4.00%

c. 8.00%

d. 8.43%

e. 16.00%

D. What is your best estimate for the cost of preferred stock?

a. 4.21%

b. 5.92%

c. 2.25%

d. 3.80%

e. 6.11%

E. What are the capital structure weights for common and preferred stock?

a. wE = 24.18%,

wP = 14.55%

b. wE = 24.18%, wP = 61.27%

c. wE = 25.00%, wP = 15.00%

d. wE = 25.00%, wP = 14.55%

e. wE = 14.55%, wP = 24.18%

F. What is the weighted average cost of capital (WACC) for the firm?

a. 5.86%

b. 10.00%

c. 6.58%

d. 8.23%

e. 4.99%