Use the following to answer questions 12-15:

Big Hero Co. has 5,000 bonds outstanding. The bonds pay 4% annual coupons. The par value is $1,000. The bonds are selling at 98% of face value and mature in 20 years. In addition, there are 1 million shares of common stock outstanding with a market price of $30 a share. The common shares were sold at $20 per share when first issued. The stock just paid a dividend of $1.20 per share and expects to increase those dividends by 3% annually. The firm's tax rate is 40%.

12.

What is the cost of equity based on the dividend growth model?

A)

6.01%

B)

7.12%

C)

9.88%

D)

8.45%

E)

10.57%

13.

If the flotation cost to issue external equity is 10% of the proceeds, what is the adjusted cost of equity that takes into consideration the flotation cost?

A)

9.04%

B)

6.70%

C)

8.12%

D)

10.33%

E)

7.58%

14.

What is the after-tax cost of debt financing?

A)

3.78%

B)

5.42%

C)

4.56%

D)

6.36%

E)

2.49%

15.

What weight should be given to debt in the WACC computation?

A)

56.20%

B)

14.04%

C)

20.05%

D)

78.33%

E)

32.76%