PART A:

Byron Corporation

Byron Corporation's present capital structure, which is also its target capital structure, is 40 percent debt and 60 percent common equity. Next year's net income is projected to be $21,000, and Byron's payout ratio is 30 percent. The company's earnings and dividends are growing at a constant rate of 5 percent; the last dividend (D₀) was $2.00; and the current equilibrium stock price is $21.88. Byron can raise all the debt financing it needs at 14.0 percent. If Byron issues new common stock, a 20 percent flotation cost will be incurred. The firm's marginal tax rate is 40 percent.

Refer toByron Corporation. Assume that at one point along the marginal cost of capital schedule the component cost of equity is 18.0 percent. What is the weighted average cost of capital at that point? choose the correct choice.

a.14.2%

b.16.4%

c.18.0%

d.10.8%

e.13.6%

PART B:

Allison Engines Corporation has established a target capital structure of 40 percent debt and 60 percent common equity. The firm expects to earn $600 in after-tax income during the coming year, and it will retain 40 percent of those earnings. The current market price of the firm's stock is P₀= $28; its last dividend was D₀= $2.20, and its expected dividend growth rate is 6 percent. Allison can issue new common stock at a 15 percent flotation cost. What will Allison's marginal cost of equity capital (not the WACC) be if it must fund a capital budget requiring $600 in total new capital? Choose the correct choice.

a.14.3%

b.13.9%

c.15.8%

d.9.7%

e.7.9%