Use the following information for questions 1-7. A corporation has 9,000,000 shares of stock outstanding at a price of $40 per share. Net Income is $28,000,000 and they just paid a dividend of $2 and the dividend is expected to grow by 5% per year forever (Therefore next years dividend will be 2*(1.05) = $2.10). The stock has a beta of .9, the current risk free rate is 4%, and the market risk premium is 6%. The corporation also has 300,000 bonds outstanding with a price of $1,100 per bond. The bond has a coupon rate of 8% with semiannual interest payments, a face value of $1,000, and 13 years to go until maturity. The company plans on adding debt until they reach their target debt ratio of 70%. They expect their before-tax cost of debt to be 9% and their cost of equity to be 14% under this new capital structure. The tax rate is 25%

Use the following information for questions 8-10: A company has Net Income of $40,000,000 and paid $18,000,000 in Dividends. They have 9,000,000 shares of stock at a price of $40 per share.

8. What is their sustainable growth rate?

a) 4.1% b) 4.8% c) 5.25% d) 6.1%

9. How large can their capital budget be without having to issue new equity if they want a capital structure that is 30% equity?

a) $62,500,000 b) $67,250,000 c) $73,333,333 d) $87,500,000

10. What is their cost of equity if flotation costs are $5 per share if their growth rate is 5%?

a) 9.2% b) 9.9% c) 10.25% d) 11%