THE COST OF CAPITAL EXERCISES (CHAPTER 10)

6. COST OF COMMON EQUITY. The future earnings, dividends, and common stock price of Callahan Technologies Inc. are expected to grow 6% per year. Callahan's common stock currently sells for $22.00 per share, its last dividend was $2.00, and it will pay a $2.12 dividend at the end of the current year.

1. Using the DCF approach, what is its cost of common equity?
2. If the firm's beta is 1.2, the risk-free rate is 6%, and the average return on the market is 13%, what will be the firm's cost of common equity using the CAPM approach?
3. If the firm's bonds earn a return of 11%, based on the bond-yield-plus-risk-premium approach, what will be r? Use the midpoint of the risk premium range discussed in
4. Section 10-5 in your calculations.
5. If you have equal confidence in the inputs used for the three approaches, what is your estimate of Callahan's cost of common equity?

11. WACC AND PERCENTAGE OF DEBT FINANCING. Hook Industries's capital structure consists solely of debt and common equity. It can issue debt at r. = 11%, and its common stock currently pays a $2.00 dividend per share (D, = $2.00). The stock's price is currently $24.75, its dividend is expected to grow at a constant rate of 7% per year, its tax rate is 35%, and its WACC is 13.95%. What percentage of the company's capital structure consists of debt?