1. What is MicroDrives's cost of common equity using the CAPM method?

   	A.	4.88%
   	B.	5.11%
   	C.	6.52%
   	D.	7.88%

2. What is MicroDrives's cost of common equity using the DCF method?

   	A.	4.88%
   	B.	6.94%
   	C.	7.52%
   	D.	7.88%

3. What is MicroDrives's cost of common equity using the Own-Bond-Yield-Plus-Judgmental-Risk Premium method?

   	A.	5.88%
   	B.	6.18%
   	C.	7.43%
   	D.	8.45%

4. What is MicroDrives's weighted average cost of capital?

   	A.	5.88%
   	B.	6.20%
   	C.	7.43%
   	D.	8.03%

MicroDrive pays 7.5% interest on their short term debt. MicroDrive's previous tax rate was 25% but they expect that in the future the tax rate will be 23.1%. The CFO says that the last time they issued bonds, the cost was 6.7%. They have some existing 20 year bonds that have a coupon rate of 6.5%, are non-callable and pay semi-annual payments. These cost $1,129. They also have some 5 years bonds that have a coupon rate of 4.8%, are non-callable and pay semi-annual payments. These cost $1,176. And they have some 20 year bonds that have a coupon rate of 6.6%, that are callable and pay semi-annual payments. These cost $1,145. They have preferred stock that has a par value of $100. The dividend rate is 7.2% and the cost is $125.76 per share. The flotation cost of the preferred stock is 2.7%. MicroDrive's stock pays an annual dividend of $1.50 which is expected to grow at a constant rate of 2.6% a year. The stock has a Beta of 1.1. The market risk premium is 5.7% and the risk free rate is .25% (that is one quarter of one percent). MicroDrive's management considers their stock to have a risk premium above their bonds of 2.0%. MicroDrive pays 7.5% interest on their short term debt. MicroDrive's previous tax rate was 25% but they expect that in the future the tax rate will be 23.1%. The CFO says that the last time they issued bonds, the cost was 6.7%. They have some existing 20 year bonds that have a coupon rate of 6.5%, are non-callable and pay semi-annual payments. These cost $1,129. They also have some 5 years bonds that have a coupon rate of 4.8%, are non-callable and pay semi-annual payments. These cost $1,176. And they have some 20 year bonds that have a coupon rate of 6.6%, that are callable and pay semi-annual payments. These cost $1,145. They have preferred stock that has a par value of $100. The dividend rate is 7.2% and the cost is $125.76 per share. The flotation cost of the preferred stock is 2.7%. MicroDrive's stock pays an annual dividend of $1.50 which is expected to grow at a constant rate of 2.6% a year. The stock has a Beta of 1.1. The market risk premium is 5.7% and the risk free rate is .25% (that is one quarter of one percent). MicroDrive's management considers their stock to have a risk premium above their bonds of 2.0%