You intend to buy Berrymore Inc.s common stock at $100 per share, hold it one year and sell after that. The firm paid a $5 per share dividend last year and its dividends are expected to grow at an annual rate of 7% for indefinite number of years. If you can sell the stock at $110, what is your expected rate of return?

As a financial analyst of the Finance Department of Daiwa Manufacturing, your supervisor has asked you to compute the appropriate weighted average cost of capital to evaluate the purchase of new equipment for the plant. The firms statement of financial position for December 31, 20xx is given below: (in U.S. dollars)

statement of financial position

Daiwas tax rate is 40% To finance the purchase, Daiwa manufacturing will issue the following securities:

Debt: Daiwa manufacturing will sell 10-year bonds paying 8% per year at the market price of$1,200. The par value of the bond is $1,000. Floatation costs for issuing the bonds are 5% of the market price.

Preferred Stocks: Preferred stock paying a $2.00 dividend can be sold for $25; the cost of issuing these shares is $1 per share.

Common Stock: Common stock for Daiwa Manufacturing is currently selling for $103 per share. The firm paid a $4 dividend last year and expects dividends to continue growing at a constant rate. The firms average annual return on equity is 20 percent and its dividend payout ratio is 25 percent. Floatation costs for issuing new common stock will be $3 per share.

7. What is Daiwa's cost of debt? 8. What is Daiwa's cost of preferred equity? 9. What is Daiwa's cost of common equity? 10.What is the weighted average cost of capital for Daiwa? Should Daiwa

Manufacturing invest in the new equipment if expected rate of return from the project is 8%?

\begin{tabular}{|c|c|c|c|c|} \hline Cash & 1,000,000 & \multicolumn{2}{|l|}{ Account payable } & 1,000,000 \\ \hline \begin{tabular}{l} Account \\ receivable \end{tabular} & 1,000,000 & Accruals & & 1,000,000 \\ \hline Inventory & 1,000,000 & Short-term debt & & 1,000,000 \\ \hline \multirow[t]{5}{*}{ Current Assets } & 3,000,000 & Total current Liabilities & & 3,000,000 \\ \hline & & Long-term debt & & 5,000,000 \\ \hline & & Preferred Stocks & & 3,000,000 \\ \hline & & Common Equity & & \\ \hline & & Common Stocks & 1,000,000 & \\ \hline \multirow{2}{*}{\begin{tabular}{l} Net fixed assets \\ Total Assets \end{tabular}} & 10,000,000 & Retained Earnings & 1,000,000 & 2,000,000 \\ \hline & 13,000,000 & Liability and equity & & 13,000,000 \\ \hline \end{tabular}