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 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$?

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?

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?

Kahn Inc. has a target capital structure of 60 percent common equity and 40 percent debt to fund its 10 billion dollars in operating assets. Furthermore, Kahn Inc. has a WACC of 13 percent, a before-tax cost of debt of 10 percent, and a tax rate of 40 percent. The company's retained earnings are adequate to provide the common equity portion of its capital budget. Its expected dividend next year $\left(D_1\right)$ is 3 dollars, and the current stock price is 35 dollars.

a. What is the company's expected growth rate?

b. If the firm's net income is expected to be 1.1 billion dollars, what portion of its net income is the firm expected to pay out as dividends?

Answer the following.

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

Trivoli Industries plans to issue perpetual preferred stock with an $\$ 11.00$ dividend. The stock is currently selling for $\$ 97.00$, but flotation costs will be $5 \%$ of the market price, so the net price will be $\$ 92.15$ 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.

Adamson Corporation is considering four average-risk projects with the following costs and rates of return:

$$\begin{matrix} \text{Project } & \text{Cost} & \text{Expected Rate of Return}\\ \text{1} & \text{\$ 2.000} & \text{16.00\\\%}\\ \text{2} & \text{3.000} & \text{15.00}\\ \text{3} & \text{5.000} & \text{13.78}\\ \text{4} & \text{2.000} & \text{12.50}\\ \end{matrix}$$

The company estimates that it can issue debt at a rate of $\mathrm{r}_{\mathrm{d}}=10 \%$, and its tax rate is 30%. It can issue preferred stock that pays a constant dividend of $5.00 per year at $50.00 per share. Also, its common stock currently sells for$38.00 per share; the next expected dividend, $D_1$, is $4.25, and the dividend is expected to grow at a constant rate of 5% per year. The target capital structure consists of 75% common stock, 15% debt, and 10% preferred stock.

a. What is the cost of each of the capital components?

b. What is Adamson’s WACC?

c. Only projects with expected returns that exceed WACC will be accepted. Which projects should Adamson accept?

The Paulson Company’s year-end balance sheet is shown below. Its cost of common equity is 14%, its before-tax cost of debt is 10%, and its marginal tax rate is 40%. Assume that the firm’s long-term debt sells at par value. The firm’s total debt, which is the sum of the company’s short-term debt and long-term debt, equals $1,167. The firm has 576 shares of common stock outstanding that sell for$4.00 per share. Calculate Paulson’s WACC using market-value weights.

$$\begin{matrix} \text{Assets} & \text{ } & \text{Liabilities and Equity}\\ \text{Cash} & \text{\$ 120} & \text{Accounts payable and accruals} & \text{\$ 10}\\ \text{Accounts receivable} & \text{240} & \text{Short-term debt} & \text{47}\\ \text{Inventories} & \text{360} & \text{Long-term debt} & \text{1.120}\\ \text{Plant and equipment, net} & \text{2.160} & \text{Common equity} & \text{1.703}\\ \text{Total assets} & \text{\$ 2.880} & \text{Total liabilities and equity} & \text{\$ 2.880}\\ \end{matrix}$$

Sidman Products's common stock currently sells for $\$ 60.00$ a share. The firm is expected to earn $\$ 5.40$ per share this year and to pay a year-end dividend of $\$ 3.60$, and it finances only with common equity.

If Sidman reinvests retained earnings in projects whose average return is equal to the stock's expected rate of return, what will be next year's EPS? Hint: Refer to the following Equation:

$$\begin{aligned} \text { Growth rate } &=(1-\text { Payout ratio }) \text { ROE } \\ &=(1-0.6) 10.0 \% \\ &=0.4(10.0 \%)=4.0 \% \end{aligned}$$

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

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?

Kahn Inc. has a target capital structure of $60 \%$ common equity and $40 \%$ debt to fund its $\$ 10$ billion in operating assets. Furthermore, Kahn Inc. has a WACC of $13 \%$, a before-tax cost of debt of $10 \%$, and a tax rate of $40 \%$. The company's retained earnings are adequate to provide the common equity portion of its capital budget. Its expected dividend next year $\left(D_1\right)$ is $\$ 3$, and the current stock price is $\$ 35$.

If the firm's net income is expected to be $\$ 1.1$ billion, what portion of its net income is the firm expected to pay out as dividends? Hint: Refer to the following Equation:

$$\begin{aligned} \text { Growth rate } &=(1-\text { Payout ratio }) \text { ROE } \\ &=(1-0.6) 10.0 \% \\ &=0.4(10.0 \%)=4.0 \% \end{aligned}$$