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##### A firm has paid dividends of $1.02, $1.10, $1.25, and $1.35 over the past

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solution

**Question**

1.) A firm has paid dividends of $1.02, $1.10, $1.25, and $1.35 over the past;4 years, respectively. What is the average dividend growth rate?;2.)A semiannual, 7 percent bond matures in 14 years and has a face value of;$1,000. The market quote on this bond is 101.4. What is the aftertax cost of debt if the tax;rate is 35 percent?;3.)Why is the tax rate applied to the cost of debt but not to the cost of equity;or preferred stock when computing a finn's weighted average cost of capital?;4.)What approach to a project's costs of capital entails the use of another;finn's cost of capital rather than the use of your own finn's cost of capital?;What is the flotation cost of equity for a finn that generates sufficient;internal cash flows to cover the equity portion of any capital expenditure?;5.)Calculating the Cost of Equity Suppose stock in Watta Corporation has a beta of.80.;The market risk premium is 6 percent, and the risk-free rate is 6 percent. Watta's last;dividend was $1.20 per share, and the dividend is expected to grow at 8 percent indefinitely.;The stock currently sells for $45 per share. What is Watta's cost of equity capital?;6.)Calculating the WACC In addition to the information given in the previous problem;suppose Watta has a target debt-equity ratio of 50 percent. Its cost of debt is;9 percent before taxes. If the tax rate is 35 percent, what is the WACC?;7.)Flotation Costs Suppose in the previous problem Watta is seeking $30 million for;a new project. The necessary funds will have to be raised externally. Watta's flotation;costs for selling debt and equity are 2 percent and 16 percent, respectively. If;flotation costs are considered, what is the true cost of the new project?;Additional Requirements;Level of Detail: Only answer needed

Paper#21193 | Written in 18-Jul-2015

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