Question 1: The earnings, dividends, and stock price of TII Inc. are expected to grow at 6%per year in the future.

TIIs common stock sells for $25 per share, its last dividend was $2.50, and the company will pay a dividend of $2.65 at the end of the current year.

Required:

a. Explain the weighted average cost of capital and its components.

b. Using the discounted cash flow approach, what is its cost of equity?

c. If the firms beta is1.5, the risk-free rate is 8%, and the expected return on the market is 14%, then what would be the firms cost of equity based on the CAPM approach?

d. If the firms bonds earn a return of 12%, then what would be your estimate of rs using the over-own-bond-yield-plus-judgmental-risk-premium approach? (Hint: Use the midpoint of the risk premium range.) e. On the basis of the results of parts a through c, what would be your estimate of TIIs cost of equity?