1.The Heuser Company\'s currently outstanding bonds have a 10% coupon and a 13%

Question

1.The Heuser Company's currently outstanding bonds have a 10% coupon and a 13% yield to maturity. Heuser believes it could issue new bonds at par that would provide a similar yield to maturity. If its marginal tax rate is 35%, what is Heuser's after-tax cost of debt? Round your answer to two decimal places.
%

2.Tunney Industries can issue perpetual preferred stock at a price of $71.50 a share. The stock would pay a constant annual dividend of $7.00 a share. What is the company's cost of preferred stock, rp? Round your answer to two decimal places.

3.Percy Motors has a target capital structure of 35% debt and 65% common equity, with no preferred stock. The yield to maturity on the company's outstanding bonds is 11%, and its tax rate is 40%. Percy's CFO estimates that the company's WACC is 14.60%. What is Percy's cost of common equity? Round your answer to two decimal places.
%

4.Javits & Sons' common stock currently trades at $28.00 a share. It is expected to pay an annual dividend of $2.25 a share at the end of the year (D1 = $2.25), and the constant growth rate is 4% a year.

What is the company's cost of common equity if all of its equity comes from retained earnings? Round your answer to two decimal places.
%

If the company were to issue new stock, it would incur a 13% flotation cost. What would the cost of equity from new stock be? Round your answer to two decimal places.

5.Patton Paints Corporation has a target capital structure of 30% debt and 70% common equity, with no preferred stock. Its before-tax cost of debt is 11% and its marginal tax rate is 40%. The current stock price is P0 = $33.00. The last dividend was D0 = $3.75, and it is expected to grow at a 4% constant rate. What is its cost of common equity and its WACC? Round your answers to two decimal places.

rs = %
WACC = %

6.Midwest Electric Company (MEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of rd = 9% as long as it finances at its target capital structure, which calls for 50% debt and 50% common equity. Its last dividend (D0) was $1.75, its expected constant growth rate is 4%, and its common stock sells for $20. MEC's tax rate is 40%. Two projects are available: Project A has a rate of return of 15%, while Project B's return is 9%. These two projects are equally risky and about as risky as the firm's existing assets.

What is its cost of common equity? Round your answer to two decimal places.
%

What is the WACC? Round your answer to two decimal places.
%

Explanation / Answer

1.Cost of Debt = Yield to Maturity x (1 - tax rate) Cost of Debt = 12% x (1 - 0.35) Cost of Debt = 7.80% 3.WACC = [Cost of Debt x Weight x (100% - tax rate)] + Cost of Equity x Weight. 9.96% = [9% x 40% x (100% - 40%)] + Cost of Equity x 60% 9.96% = 2.16% + Cost of Equity x 60% 9.96% - 2.16% = Cost of Equity x 60% Cost of Common Equity = 7.8% / 60% Cost of Common Equity = 13.00%

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