Q#1 (3.5 Marks): XYZ Inc. is considering investing in the hotel business. The company has a D/E ratio of1.3, a before-tax cost of debt of 7.5%, and a marginal tax rate of 40%.ABC Hotels is a publicly traded company that operates only in the hotel industry. The company has a D/Eratio of 1.8, an equity beta of 0.8, and marginal tax rate of 37.5%.The risk-free rate is 5% and expected market risk premium is 8%. What is the weighted average cost ofcapital that XYZ Inc?

Q#2 (1.5 Marks): JB Associates earned net income of $4.5 million in 2009. The company announceddividends of $0.818 per share which will grow at a constant rate forever. Given that the weightedaverage number of common shares outstanding in 2009 is 2.2 million and that the companys bookvalue of equity in 2008 and 2009 is $22 million and $28 million respectively. What is the annual growthrate in dividends?