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2. Calculating Cost of Equity The Tubby Ball Corpo...




2. Calculating Cost of Equity The Tubby Ball Corporation?s common stock has a beta of 1.05. If the risk-free rate is 5.3 percent and the expected return on the market is 12 percent, what is the company?s cost of equity capital? 3. Calculating Cost of Equity Stock in Parrothead Industries has a beta of .85. The market risk premium is 8 percent, and T-bills are currently yielding 5 percent. Parrothead?s most recent dividend was $1.60 per share, and dividends are expected to grow at a 6 percent annual rate indefinitely. If the stock sells for $37 per share, what is your best estimate of the company?s cost of equity? 7. Calculating Cost of Debt Jiminy?s Cricket Farm issued a 30-year, 8 percent semiannual bond 7 years ago. The bond currently sells for 95 percent of its face value. The company?s tax rate is 35 percent. a. What is the pretax cost of debt? b. What is the aftertax cost of debt? c. Which is more relevant, the pretax or the aftertax cost of debt? Why? 9. Calculating WACC Mullineaux Corporation has a target capital structure of 60 percent common stock, 5 percent preferred stock, and 35 percent debt. Its cost of equity is 14 percent, the cost of preferred stock is 6 percent, and the cost of debt is 8 percent. The relevant tax rate is 35 percent. a. What is Mullineaux?s WACC? b. The company president has approached you about Mullineaux?s capital structure. He wants to know why the company doesn?t use more preferred stock financing, since it costs less than debt. What would you tell the president? 11. Finding the Target Capital Structure Fama?s Llamas has a weighted average cost of capital of 8.9 percent. The company?s cost of equity is 12 percent and its cost of debt is 7.9 percent. The tax rate is 35 percent. What is Fama?s target debt-equity ratio?


Paper#5260 | Written in 18-Jul-2015

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