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1. Judy's Boutique just paid an annual dividend of $1.65 on its common stock. The firm increases its dividend by 2.5 percent annually. What is the rate of return on this stock if the current stock price is $38.20 a share? π0 = π·0 (1+π) πβπ 38.20 = 1.65 (1 + .025) π β .025 π = 0.06927 β 0.0693 2. Jet Setters has a cost of equity of 17.8 percent. The market risk premium is 10.2 percent and the risk-free rate is 4.4 percent. The company is acquiring a competitor, which will increase the company's beta to 1.6. What effect, if any, will the acquisition have on the firm's cost of equity capital? πΎπ = ππ + π½(ππ β ππ ) . 044 + 1.6(. 102) = .2072 . 2072 β .178 = .0292 3. Musical Charts just paid an annual dividend of $2.45 per share. This dividend is expected to increase by 3.3 percent annually. Currently, the firm has a beta of 1.09 and a stock price of $36 a share. The risk-free rate is 4.2 percent and the market rate of return is 12.6 percent. What is the cost of equity capital for this firm using (i) discount growth model approach (ii) CAPM approach? i. π0 = π·0 (1+π) πβπ 36 = 2.45 (1 + .033) π β .033 π = 0.103301 ii. πΎπ = ππ + π½(ππ β ππ ) . 042 + 1.09(. 126 β .042) = .13356 4. Winter Wear, Inc. has 6 percent bonds outstanding that mature in 13 years. The bonds pay interest semiannually and have a face value of $1,000. Currently, the bonds are selling for $993 each. What is the firm's pre-tax cost of debt? **find the yield to maturity for the bond ππππππ₯ ππ‘π = πΉβπ ) π πΉ+π ( ) 2 πΆ+ ( C = coupon payment F= face value P = present value N= years to maturity ππππππ₯ ππ‘π = 1000 β 993 ) 13 = 0.060751 β .0608 1000 β 993 ( ) 2 60 + ( 5. Sunshine Cruises issues only common stock and coupon bonds. The firm has a debt-equity ratio of 0.55. The cost of equity is 16.3 percent and the pre-tax cost of debt is 9.9 percent. What is the capital structure weight of the firm's equity if the firm's tax rate is 34 percent? . 55 = π· = 55 π· 55 = πΈ 100 πΈ = 100 ππ = π· + πΈ = 55 + 100 = 155 %πΈ = πΈ 100 = = .64516 β .6452 ππ 155 6. Catnip Stores has a $20 million bond issue outstanding that currently has a market value of $18.6 million. The bonds mature in 6.5 years and pay semiannual interest payments of $30 each. What is the firm's pretax cost of debt? 18.6 πΆπ’πππππ‘ πππππ ππ ππππ = ( ) β 1000 = 930 20 πππ = 30 π = 6.5 β 2 = 13 ππ = β930 πΉπ = 1000 πΌ =? πΌ = .036875 πΌ = .036875 β 2 = .0737 7. Hi Tech Products has 35,000 bonds outstanding that are currently quoted at 102.3. The bonds mature in 11 years and carry a 9 percent annual coupon. What is the firm's after-tax cost of debt if the applicable tax rate is 35 percent? πππ = 9 π = 11 ππ = β102.3 πΉπ = 100 πΌ =? πΌ = .08667 πΎπ = π β (1 β π‘) = .08667 β (1 β .35) = .0563 8. The General Store has a cost of equity of 15.8 percent, a pre-tax cost of debt of 7.7 percent, and a tax rate of 32 percent. What is the firm's weighted average cost of capital if the debt-equity ratio is 0.40? .4 = π· = 40 π· 40 = πΈ 100 πΈ = 100 ππ = π· + πΈ = 40 + 100 = 140 %πΈ = πΈ 100 = = .7143 ππ 140 %π· = πΈ 40 = = .2857 ππ 140 ππ΄πΆπΆ = π· β πΎπ β (1 β π‘) + πΈ β πΎπ = .2857 β .077 β .32 + .7143 β .158 = .1278 9. A firm wants to create a weighted average cost of capital (WACC) of 10.4 percent. The firm's cost of equity is 14.5 percent and its pre-tax cost of debt is 8.5 percent. The tax rate is 34 percent. What does the debt-equity ratio need to be for the firm to achieve its target WACC? ππ = π· + πΈ . ππ πΈ π· = 1+( ) πΈ . 104 = πΈ π· πΈ π· β .145 + β .085 β .66 = β .145 + β .0561 ππ ππ ππ ππ (. 104) ππ πΈ π· ππ = (. 145 ( ) + .0561 ( )) πΈ ππ ππ πΈ π· π· . 104 (1 + ( )) = .145 + .0561 ( ) πΈ πΈ π· π· . 104 + .104 ( ) = .145 + .0561 ( ) πΈ πΈ π· π· . 104 ( ) = .041 + .0561 ( ) πΈ πΈ π· . 0479 ( ) = .041 πΈ π· . 041 = = .855 β .86 πΈ . 0479 10. Southwest Tours currently has a weighted average cost of capital of 11.3 percent based on a combination of debt and equity financing. The firm has no preferred stock. The current debt-equity ratio is 0.58 and the after-tax cost of debt is 6.4 percent. The company just hired a new president who is considering eliminating all debt financing. All else constant, what will the firm's cost of capital be if the firm switches to an all-equity firm? . 58 = π· = 58 π· 58 = πΈ 100 πΈ = 100 ππ = π· + πΈ = 58 + 100 = 158 %πΈ = πΈ 100 = = .6329 ππ 158 %π· = πΈ 58 = = .3671 ππ 158 . 113 = .3671 β .064 + .6329 β πΎπ = .0234944 + .6329 β πΎπ . 113 = .0234944 + .6329 β πΎπ . 0895056 = .6329 β πΎπ πΎπ = .1414