Questions 6 through 9 relate to the following problem: Daves Inc. recently hired you as a consultant to estimate the companys WACC. You have obtained the following information. The firm has $400,000 of debt outstanding, $200,000 of preferred stock, $300,000 of retained earnings and $300,000 of new common stock. The firms bonds mature in 20 years and have a 10% yield to maturity. The companys tax rate is 40%. The firms preferred stock currently sells for $80 a share and pays an annual dividend of $11. The firm is expected to pay a $2.50 dividend at year end (D1 = $2.50), the dividend is expected to grow at a constant rate of 5.50% a year, and the common stock currently sells for $52.50 a share. The issuance of new common stock would incur the firm 6% flotation cost.

6. The cost of preferred stock is: *

A. 14%

B. 6%

C. 13.5%

D. 13.75%

E. None of the above

7. The cost of common equity using retained earnings is: *

A. 13.75%

B. 10%

C. 10.26%

D. 10.57%

E. None of the above

8. The cost of external equity is: *

A. 13.75%

B. 10.26%

C. 6%

D. 10.57%

E. None of the above

9. The Weighted Average Cost of Capital (WACC) is: *

A. 19.50%

B. 10.29%

C. 9.50%

D. 15%

E. None of the above