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?

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

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?

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 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$?

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

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.

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?

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?

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, $r_s$?

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?

Jarett & Sons’s 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 $\left(\mathrm{D}_{1}=\$ 1.00\right)$, and the constant growth rate is 4% a year. a. What is the company’s cost of common equity if all of its equity comes from retained earnings? b. If the company issued new stock, it would incur a 10% flotation cost. What would be the cost of equity from new stock?

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?

The following table gives Foust Company’s earnings per share for the last 10 years. The common stock, 7.8 million shares outstanding, is now (1/1/17) selling for $65.00 per share. The expected dividend at the end of the current year (12/31/17) is 55$

$$\begin{matrix} \text{Year} & \text{EPS} & \text{Year} & \text{EPS}\\ \text{2007} & \text{\$ 3.90} & \text{2012} & \text{\$ 5.73}\\ \text{2008} & \text{4.21} & \text{2013} & \text{6.19}\\ \text{2009} & \text{4.55} & \text{2014} & \text{6.38}\\ \text{2010} & \text{4.91} & \text{2015} & \text{7.22}\\ \text{2011} & \text{5.31} & \text{2016} & \text{7.80}\\ \end{matrix}$$

$The current interest rate on new debt is 9$$\mathrm{r}$${\mathrm{s}}$=$\mathrm{D}${1} / $\mathrm{P}$_{0}+$$\mathrm{g}$. b. Find Foust’s WACC.