COST OF COMMON EQUITY

Pearson Motors has a target capital structure of 35% debt and 65% common equity, with no preferred stock. The yield to maturity on the company's outstanding bonds is 9%, and its tax rate is 40%. Pearson's CFO estimates that the company's WACC is 13.20%. What is Pearson's cost of common equity? Do not round intermediate calculations. Round your answer to two decimal places.

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COST OF EQUITY WITH AND WITHOUT FLOTATION

Jarett &Sons's common stock currently trades at $23.00 a share. It is expected to pay an annual dividend of $2.50 a share at the end of the year (D1 = $2.50), and the constant growth rate is 7% a year.

1. What is the company's cost of common equity if all of its equity comes from retained earnings? Round your answer to two decimal places. Do not round your intermediate calculations.
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2. If the company issued new stock, it would incur a 10% flotation cost. What would be the cost of equity from new stock? Round your answer to two decimal places. Do not round your intermediate calculations.
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roblem Walk-Through

COST OF COMMON EQUITY

The future earnings, dividends, and common stock price of Callahan Technologies Inc. are expected to grow 6% per year. Callahan's common stock currently sells for $30.00 per share; its last dividend was $2.50; and it will pay a $2.65 dividend at the end of the current year.

1. Using the DCF approach, what is its cost of common equity? Round your answer to two decimal places. Do not round your intermediate calculations.
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2. If the firm's beta is 0.90, the risk-free rate is 5%, and the average return on the market is 13%, what will be the firm's cost of common equity using the CAPM approach? Round your answer to two decimal places.
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3. If the firm's bonds earn a return of 10%, based on the bond-yield-plus-risk-premium approach, what will be rs? Use the midpoint of the risk premium range discussed in Section 10-5 in your calculations. Round your answer to two decimal places.
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4. If you have equal confidence in the inputs used for the three approaches, what is your estimate of Callahan's cost of common equity? Round your answer to two decimal places. Do not round your intermediate calculations.
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WACC

The Pawlson Company's year-end balance sheet is shown below. Its cost of common equity is 15%, its before-tax cost of debt is 11%, 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 $1,158. The firm has 576 shares of common stock outstanding that sell for $4.00 per share.

Calculate Pawlson's WACC using market-value weights. Round your answer to two decimal places. Do not round your intermediate calculations.
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WACC AND PERCENTAGE OF DEBT FINANCING

Hook Industries's capital structure consists solely of debt and common equity. It can issue debt at rd = 11%, and its common stock currently pays a $3.00 dividend per share (D0 = $3.00). The stock's price is currently $21.50, its dividend is expected to grow at a constant rate of 9% per year, its tax rate is 40%, and its WACC is 15.65%. What percentage of the company's capital structure consists of debt? Do not round intermediate calculations. Round your answer to two decimal places.

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WACC AND OPTIMAL CAPITAL BUDGET

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

The company estimates that it can issue debt at a rate of rd = 10%, and its tax rate is 40%. It can issue preferred stock that pays a constant dividend of $5 per year at $42 per share. Also, its common stock currently sells for $34 per share; the next expected dividend, D1, is $3.50; and the dividend is expected to grow at a constant rate of 6% per year. The target capital structure consists of 75% common stock, 15% debt, and 10% preferred stock.

1. What is the cost of each of the capital components? Round your answers to two decimal places. Do not round your intermediate calculations.
   Cost of debt  %
   Cost of preferred stock  %
   Cost of retained earnings  %

2. What is Adamson's WACC? Round your answer to two decimal places. Do not round your intermediate calculations.
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3. Only projects with expected returns that exceed WACC will be accepted. Which projects should Adamson accept?