Practice Questions - Chapter 9 1. McCall Corporation has a capital structure consisting of 55 percent common equity, 30 percent debt, and 15 percent preferred stock. Any debt issues would have a pre-tax cost of 9.5%. Preferred stock can be issued for a cost of 11.5%. Common equity can be issued, but flotation costs of $4.25 per share of common stock would be paid. McCall common stock is currently selling in the market at $65 per share McCall recently paid a dividend of $4 per share and company earnings and dividends are expected to grow at an annual rate of 8% indefinitely. McCall has a tax rate of 21% and the firm wants to keep its current capital structure. If the firm needs to raise additional equity, what will be the firm's cost of capital? E: (.55) a) 11.76% b) 12.04% c) 12.29% d) 11.99% e) 12.89% annonim estan to non D = (-3) 1.095) p= 1.15) (115) 2. A firm has $5 million in retained earnings. The market price of the firm's common stock is $55. The firm recently paid a dividend of $3.70. Earnings and dividends are expected to increase at an annual rate of 9 percent. When new common stock is issued, flotation costs amount to 4 percent of market price. What is the firm's cost of external equity financing? a) 7.6% b) 16.0% d) 16.3% e) 15.7% 3.70 (1.06) 9.55 .04) .09