Question

c14

1.

Stock in Dragula Industries has a beta of 1.6. The market risk premium is 6 percent, and T-bills are currently yielding 5.50 percent. The company’s most recent dividend was $1.90 per share, and dividends are expected to grow at a 7.0 percent annual rate indefinitely.

If the stock sells for $38 per share, what is your best estimate of the company’s cost of equity? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Cost of equity

%

#4

You are given the following information for Lightning Power Co. Assume the company’s tax rate is 30 percent.

Debt:	6,000 7.9 percent coupon bonds outstanding, $1,000 par value, 25 years to maturity, selling for 108 percent of par; the bonds make semiannual payments.
Common stock:	510,000 shares outstanding, selling for $69 per share; the beta is 1.12.
Preferred stock:	29,000 shares of 4 percent preferred stock outstanding, currently selling for $89 per share.
Market:	10 percent market risk premium and 5.90 percent risk-free rate.

What is the company's WACC? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

WACC

%

#5

Scanlin, Inc., is considering a project that will result in initial aftertax cash savings of $1.84 million at the end of the first year, and these savings will grow at a rate of 1 percent per year indefinitely. The firm has a target debt–equity ratio of 0.75, a cost of equity of 12.4 percent, and an aftertax cost of debt of 5.2 percent. The cost-saving proposal is somewhat riskier than the usual project the firm undertakes; management uses the subjective approach and applies an adjustment factor of 3 percent to the cost of capital for such risky projects.

What is the maximum initial cost the company would be willing to pay for the project? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567. Do not round intermediate calculations and round your final answer to the nearest whole dollar amount.)

Maximum cost

$

#6

Berta Industries stock has a beta of 1.25. The company just paid a dividend of $0.40, and the dividends are expected to grow at 5 percent. The expected return on the market is 12 percent, and Treasury bills are yielding 6.4 percent. The most recent stock price for Berta is $81.

a.	Calculate the cost of equity using the DCF method. (Round your answer to 2 decimal places. (e.g., 32.16))

DCF method

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b.	Calculate the cost of equity using the SML method. (Round your answer to 2 decimal places. (e.g., 32.16))

SML method

%