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?

The Evanec Company’s next expected dividend, $D_1$, is $3.18; its growth rate is 6%; and its common stock now sells for$36.00. New stock (external equity) can be sold to net $32.40 per share. a. What is Evanec’s cost of retained earnings,$r_s$? b. What is Evanec’s percentage flotation cost, F? c. What is Evanec’s cost of new common stock,$r_e$?

Empire Electric Company (EEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of $r_{d}=9 \%$ structure, which calls for 35% debt and 65% common equity. Its last dividend $\left(D_{0}\right)$ was $2.20, its expected constant growth rate is 6%, and its common stock sells for$26. EEC’s tax rate is 40%. Two projects are available: Project A has a rate of return of 12%, and Project B’s return is 11%. These two projects are equally risky and about as risky as the firm’s existing assets. a. What is its cost of common equity? b. What is the WACC? c. Which projects should Empire accept?

The Holmes Company’s currently outstanding bonds have an 8% coupon and a 10% 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%, what is Holmes’ after-tax cost of debt?

Klose Outfitters Inc. believes that its optimal capital structure consists of $60 \%$ common equity and $40 \%$ debt, and its tax rate is $40 \%$. Klose must raise additional capital to fund its upcoming expansion. The firm will have $\$ 2$ million of retained earnings with a cost of $r_5=12 \%$. New common stock in an amount up to $\$ 6$ million would have a cost of $\mathrm{r}_{\mathrm{e}}=15 \%$. Furthermore, Klose can raise up to $\$ 3$ million of debt at an interest rate of $\mathbf{r}_{\mathrm{d}}=10 \%$ and an additional $\$ 4$ million of debt at $\mathrm{r}_{\mathrm{d}}=12 \%$. The CFO estimates that a proposed expansion would require an investment of $\$ 5.9$ million. What is the WACC for the last dollar raised to complete the expansion?

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, $\mathrm{T}_{\mathrm{P}} ?$

The Bouchard Company’s EPS was $6.50 in 2016, up from$4.42 in 2011. The company pays out 40% of its earnings as dividends, and its common stock sells for $36.00. a. Calculate the past growth rate in earnings. (Hint: This is a 5-year growth period.) b. The last dividend was$$\mathrm{D}$_{0}=0.4($6.50)=$ 2.60$. Calculate the next expected dividend, $D_1$, assuming that the past growth rate continues. c. What is Bouchard's cost of retained earnings, $r_s$?

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.

Answer the following.

Hook Industries's capital structure consists solely of debt and common equity. It can issue debt at $\mathrm{r}_{\mathrm{d}}=11$ percent, and its common stock currently pays a 2.00 dollars dividend per share ($\mathrm{D}_0=2.00$ dollars). The stock's price is currently 24.75 dollars, its dividend is expected to grow at a constant rate of 7 percent per year, its tax rate is 35 percent, and its WACC is 13.95 percent. What percentage of the company's capital structure consists of debt?

Ballack Co.'s common stock currently sells for $\$ 46.75$ per share. The growth rate is a constant $12 \%$, and the company has an expected dividend yield of $5 \%$. The expected long-run dividend payout ratio is $25 \%$, and the expected return on equity (ROE) is $16 \%$. New stock can be sold to the public at the current price, but a flotation cost of $5 \%$ would be incurred. What would be the cost of new equity?

WACC Lancaster Engineering Inc. (LEI) has the following capital structure, which it considers to be optimal:

$$\begin{array}{lc} \text{Debt} & 25 \% \\ \text{Preferred stock} & 15 \\ \text{Common equity} & 60 \\ \hline & 100 \% \\ \hline \hline \end{array}$$

LEI's expected net income this year is $\$ 34,285.72$; its established dividend payout ratio is $30 \%$; its federal-plus-state tax rate is $40 \%$; and investors expect future earnings and dividends to grow at a constant rate of $9 \%$. LEI paid a dividend of $\$ 3.60$ per share last year, and its stock currently sells for $\$ 54.00$ per share. LEI can obtain new capital in the following ways:

• New preferred stock with a dividend of $\$ 11.00$ can be sold to the public at a price of $\$ 95.00$ per share.

• Debt can be sold at an interest rate of $12 \%$.

Calculate the WACC.

Banyan Co.’s common stock currently sells for $46.75 per share. The growth rate is a constant 6%, and the company has an expected dividend yield of 5%. The expected long-run dividend payout ratio is 20%, and the expected return on equity (ROE) is 7.5%. New stock can be sold to the public at the current price, but a flotation cost of 5% would be incurred. What would be the cost of new equity?

The Evanec Company's next expected dividend, $D_1$, is $\$ 3.18$; its growth rate is $6 \%$; and its common stock now sells for $\$ 36.00$. New stock (external equity) can be sold to net $\$ 32.40$ per share.

What is Evanec's percentage flotation cost, F?