Torch Industries can issue perpetual preferred stock at a price of $57.00 a share. The stock would pay a constant annual dividend of$6.00 a share. What is the company’s cost of preferred stock, $\mathrm{T}_{\mathrm{P}} ?$

Palencia Paints Corporation has a target capital structure of 35% debt and 65% common equity, with no preferred stock. Its before-tax cost of debt is 8%, and its marginal tax rate is 40%. The current stock price is $\mathrm{P}_{0}=\$ 22.00$. The last dividend was $\mathrm{D}_{0}=\$ 2.25$, and it is expected to grow at a 5% constant rate. What is its cost of common equity and its WACC?

Answer the following.

Torch Industries can issue perpetual preferred stock at a price of 57.00 dollars a share. The stock would pay a constant annual dividend of 6.00 dollars a share. What is the company's cost of preferred stock, $r_p$ ?

Percy Motors has a target capital structure of $40 \%$ debt and $60 \%$ common equity, with no preferred stock. The yield to maturity on the company's outstanding bonds is $9 \%$, and its tax rate is $40 \%$. Percy's CFO estimates that the company's WACC is $9.96 \%$. What is Percy's cost of common equity?

Travis Industries plans to issue perpetual preferred stock with an $11.00 dividend. The stock is currently selling for$108.50, but flotation costs will be 5% of the market price, so the net price will be $103.08 per share. What is the cost of the preferred stock, including flotation?

Midwest Water Works estimates that its WACC is 10.5%. The company is considering the following capital budgeting projects: $$ \begin{matrix} \text{Project } & \text{Size} & \text{Rate of Return}\\ \text{A} & \text{\$ 1 million} & \text{12.0\\%}\\ \text{B} & \text{2 million} & \text{11.5}\\ \text{C} & \text{2 million} & \text{11.2}\\ \text{D} & \text{2 million} & \text{11.0}\\ \text{E} & \text{1 million} & \text{10.7}\\ \text{F} & \text{1 million} & \text{10.3}\\ \text{G} & \text{1 million} & \text{10.2}\\ \end{matrix} $$ Assume that each of these projects is just as risky as the firm’s existing assets and that the firm may accept all the projects or only some of them. Which set of projects should be accepted? Explain.

Olsen Outfitters Inc. believes that its optimal capital structure consists of $55\%$ common equity and $45\%$ debt, and its tax rate is $40\%$. Olsen must raise additional capital to fund its upcoming expansion. The firm will have $\$4$ million of retained earnings with a cost of $\mathrm{r}_{\mathrm{s}}=11 \%$. New common stock in an amount up to $\$8$ million would have a cost of $\mathrm{r}_{\mathrm{e}}=12.5 \%$. Furthermore, Olsen can raise up to $\$4$ million of debt at an interest rate of $\mathrm{r}_{\mathrm{d}}=9 \%$ and an additional $\$5$ million of debt at $r_{d}=13 \%$. The CFO estimates that a proposed expansion would require an investment of $\$8.2$ million. What is the WACC for the last dollar raised to complete the expansion?

Answer the following.

The Holmes Company's currently outstanding bonds have an 8 percent coupon and a 10 percent yield to maturity. Holmes believes it could issue new bonds at par that would provide a similar yield to maturity. If its marginal tax rate is 40 percent, what is Holmes' after-tax cost of debt?

Hook Industries’s capital structure consists solely of debt and common equity. It can issue debt at $r_{d}=11 \%$, and its common stock currently pays a $2.00 dividend per share$\left($\mathrm{D}$_{0}=$2.00\right)$. The stock's price is currently $24.75, its dividend is expected to grow at a constant rate of 7% per year, its tax rate is 35%, and its WACC is 13.95%. What percentage of the company’s capital structure consists of debt?

Jarett & Sons' common stock currently trades at $\$ 30.00$ a share. It is expected to pay an annual dividend of $\$ 1.00$ a share at the end of the year $\left(D_1=\$ 1.00\right)$, and the constant growth rate is $4 \%$ a year.

If the company issued new stock, it would incur a $10 \%$ flotation cost. What would be the cost of equity from new stock?

Compare the cost of a take-out meal to a similar meal prepared at home.

How would each of the following scenarios affect a firm's cost of debt, $r_d(1-T)$; its cost of equity, $\mathrm{r}_{\mathrm{s}}$; and its WACC? Indicate with a plus $(+)$, a minus $(-)$, or a zero $(0)$ whether the factor would raise, lower, or have an indeterminate effect on the item in question. Assume for each answer that other things are held constant, even though in some instances this would probably not be true. Be prepared to justify your answer but recognize that several of the parts have no single correct answer. These questions are designed to stimulate thought and discussion.

	Effect on
	$\mathbf{r}_d(1-T)$	$\mathbf{r}_{\mathrm{s}}$	WACC
a. The corporate tax rate is lowered.	_________	_________	_________
b. The Federal Reserve tightens credit.	_________	_________	_________
c. The firm uses more debt; that is, it increases its debt ratio.	_________	_________	_________
d. The dividend payout ratio is increased.	_________	_________	_________
e. The firm doubles the amount of capital it raises during the year.	_________	_________	_________
f. The firm expands into a risky new area.	_________	_________	_________
g. The firm merges with another firm whose earnings are countercyclical both to those of the first firm and to the stock market.	_________	_________	_________
h. The stock market falls drastically, and the firm's stock price falls along with the rest.	_________	_________	_________
i. Investors become more risk-averse.	_________	_________	_________
j. The firm is an electric utility with a large investment in nuclear plants. Several states are considering a ban on nuclear power generation.	_________	_________	_________

Holtzman Clothiers’s stock currently sells for $38.00 a share. It just paid a dividend of$2.00 a share (i.e., $\left.\mathrm{D}_{0}=\$ 2.00\right)$. The dividend is expected to grow at a constant rate of 5% a year. What stock price is expected 1 year from now? What is the required rate of return?

Computech Corporation is expanding rapidly and currently needs to retain all of its earnings; hence, it does not pay dividends. However, investors expect Computech to begin paying dividends, beginning with a dividend of $0.50 coming 3 years from today. The dividend should grow rapidly—at a rate of 35% per year—during Years 4 and 5; but after Year 5, growth should be a constant 7% per year. If the required return on Computech is 13%, what is the value of the stock today?