The Dempere Imports Company's EPS in 2014 was $1.85, and in 2009 it was $1.12. The company's

Question:

The Dempere Imports Company's EPS in 2014 was $1.85, and in 2009 it was $1.12. The company's payout ratio is 40%, and the stock is currently valued at $62.35. Flotation costs for new equity will be 12%. Net income in 2015 is expected to be $15 million.
The company's investment banker estimates that it could sell 10-year semiannual bonds with a rate of 7%. The would be $1,000 and the flotation costs for a bond issue would be 3%. The market-value weights of the firm's debt and equity are 30% and 70%, respectively. The firm faces a 35% tax rate.
a. Based on the five-year track record, what is Dempere's EPS growth rate? What will the be in 2015?
b. Calculate the firm's cost of retained earnings and the cost of new common equity.
c. Calculate the break-point associated with retained earnings.
d. What is the firm's after-tax cost of new debt?
e. If Dempere's after-tax is 6%, what is the WACC with retained earnings? With new common equity?
f. Create a scatter chart that shows the firm's marginal WACC as a step function. The x-axis should go to at least $20 million. Be sure to fully label the chart, including a data label with leader lines that shows the value of the break-point.
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