The Envelope Company has the following liabilities and equity Liabilities and Stockholders Equity Accounts Payable and Accruals $ 550

Short Term Notes Payable $1,100

Long Term Bank Financing $2,000 Total Liabilities $3,650 Stockholders Equity $3,250 Total Liabilities and Equity $6,900 The risk free rate of return is 3.0%. The market rate of return is 12.5%. The Beta is 1.2. The P/E ratio is 7.1. The stock price is $14.80. The last annual dividend was $0.60. This dividend is expected to grow 4.5% per year in the future. There are 255 shares of common stock outstanding. Envelopes tax rate is 35%. The interest rate is 2.75% on short term notes payable and 5.3% on long term bank financing. Calculate the rate of return on equity using the dividend growth model.

8.7%

13.8%

8.5%

11.3%

10.2%

Calculate the required rate of return on equity using the security market line (CAPM) method.

8.7%

10.8%

9.0%

14.4%

13.8%

What is the market value capital structure of the company?

76% debt and 24% equity

45% debt and 55% equity

47% debt and 53% equity

24% debt and 76% equity

53% debt and 47% equity

What is the after tax cost of accounts payable?

5.75%

1.79%

0.0%

3.45%

2.75%

What is the after tax cost of short term notes payable?

5.75%

0.0%

3.45%

2.75%

1.79%

What is the after tax cost of long term bank financing?

3.45%

0.0%

2.75%

5.75%

1.79%