1) The Boos Co. just issued a dividend of $2.40 per share on its common stock. The company is expected to maintain a constant 6 percent growth rate in its dividends indefinitely. If the stock sells for $48 a share, what is the company’s cost of equity?
2) Iceberg Corporation’s common stock has a beta of 1.30. If the risk-free rate is 5 percent and the expected return on the market is 13 percent, what is the company’s cost of equity capital?
3) ICU Window, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with seven years to maturity that is quoted at 93 percent of face value. The issue makes semiannual payments and has an embedded cost of 5.6 percent annually. What is ICU’s pretax cost of debt? If the tax rate is 38 percent, what is the aftertax cost of debt?
4) Sixth Fourth Bank has an issue of preferred stock with a $6 stated dividend that just sold for $94 per share. What is the bank’s cost of preferred stock?
5) Mullineaux Corporation has a target capital structure of 70 percent common stock, 5 percent preferred stock, and 25 percent debt. Its cost of equity is 14 percent, the cost of preferred stock is 6 percent, and the cost of debt is 7.5 percent. The relevant tax rate is 35 percent.
a. What is Mullineaux’s WACC?
b. The company president has approached you about Mullineaux’s capital structure. He wants to know why the company doesn’t use more preferred stock financing, since it costs less than debt. What would you tell the president?
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