The following data applies to LeVeit Company: LeVit has a target debt-equity ratio of 0.5. LeVits bonds are currently yielding 10%. LeVit is a constant growth (5%) firm that just paid a dividend of $3.00. LeVits stock sells for $31.50 per share. The companys marginal tax rate is 40%. If the company has a debt-to-equity ratio of 0.5, it will have $0.50 in debt for each $1.00 in equity. V= debt + equity = 0.5+1 = $1.5.

1. The after tax cost of debt is equal to: *

A. 15%

B. 5%

C. 6%

D. 10%

E. None of the above

2. The cost of equity (rs) is equal to: *

A. 15%

B. 5%

C. 6%

D. 10%

E. None of the above

3. The companys weighted average cost of capital is closest to: *

A. 10.5%

B. 11.0%

C. 12%

D. 13%

E. None of the above

4. S. Bouchard and Company hired you as a consultant to help estimate its cost of capital. You have obtained the following data: D0 = $0.50; P0 = $22.00; and g = 6.00% (constant). The CEO thinks, however, that the stock price is temporarily depressed, and that it will soon rise to $40.00. Based on the DCF approach, by how much would the cost of equity from retained earnings change if the stock price changes as the CEO expects? *

A. -1.49%

B. -1.66%

C. -1.08%

D. -2.03%

E. -2.23%

5. Eakins Inc.s common stock currently sells for $50.00 per share, the company expects to earn $2.75 per share during the current year, its expected payout ratio is 70%, and its expected constant growth rate is 6.00%. New stock can be sold to the public at the current price, but a flotation cost of 8% would be incurred. By how much would the cost of new stock exceed the cost of retained earnings? *

A. 0.09%

B. 0.19%

C. 0.33%

D. 0.56%

E. 0.84%

6. You were hired as a consultant to Quigley Company, whose target capital structure is 30% debt, 15% preferred, and 55% common equity. The interest rate on new debt is 6.50%, the yield on the preferred is 6.00%, the cost of retained earnings is 11.25%, and the tax rate is 40%. The firm will not be issuing any new stock. What is Quigley's WACC? *

A. 8.15%

B. 8.26%

C. 8.82%

D. 9.17%