The Pierce Co. just issued a dividend of $3.00 per share on its common stock. The company is expected to maintain

a constant 5 percent growth rate in its dividends indefinitely. If the stock sells for $43.80 a share, what is the company’s cost of equity?

Suppose Potter Ltd. just issued a dividend of $2.50 per share on its common stock. The company paid dividends of $2.00, $2.07, $2.24, and $2.34 per share in the last four years. If the stock currently sells for $69, what is your best estimate of the company’s cost of equity capital using arithmetic and geometric growth rates?

Sixth Fourth Bank has an issue of preferred stock with a $7.10 stated dividend that just sold for $76 per share. What is the bank’s cost of preferred stock?

Jiminy’s Cricket Farm issued a 20-year, 7 percent semiannual coupon bond 4 years ago. The bond currently sells for 104 percent of its face value. The company’s tax rate is 23 percent. What is the company’s pretax cost of debt? What is the company’s aftertax cost of debt?

Masterson, Inc., has 7 million shares of common stock outstanding. The current share price is $67, and the book value per share is $6. The company also has two bond issues outstanding. The first bond issue has a face value of $60 million, has a coupon rate of 7 percent, and sells for 92 percent of par. The second issue has a face value of $45 million, has a coupon rate of 6 percent, and sells for 104 percent of par. The first issue matures in 22 years, the second in 7 years. Both bonds make semiannual coupon payments.

What are the company’s capital structure weights on a book value basis? 

What are the company’s capital structure weights on a market value basis?

Which are more relevant, the book or market value weights?

You are given the following information for Lightning Power Co. Assume the company’s tax rate is 25 percent.

Debt:15,000 6.4 percent coupon bonds outstanding, $1,000 par value, 28 years to maturity, selling for 106 percent of par; the bonds make semiannual payments.

Common stock:480,000 shares outstanding, selling for $66 per share; beta is 1.17.    Preferred stock:21,000 shares of 4.2 percent preferred stock outstanding, currently selling for $87 per share. The par value is $100 per share.

Market:5 percent market risk premium and 5.3 percent risk-free rate.

 What is the company’s WACC? 

Minion, Inc., has no debt outstanding and a total market value of $150,000. Earnings before interest and taxes, EBIT, are projected to be $36,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 15 percent higher. If there is a recession, then EBIT will be 25 percent lower. The company is considering a $95,000 debt issue with an interest rate of 8 percent. The proceeds will be used to repurchase shares of stock. There are currently 6,000 shares outstanding. Ignore taxes for this problem.

Calculate earnings per share (EPS) under each of the three economic scenarios before any debt is issued.

Calculate the percentage changes in EPS when the economy expands or enters a recession. Calculate earnings per share (EPS) under each of the three economic scenarios assuming the company goes through with recapitalization. Given the recapitalization, calculate the percentage changes in EPS when the economy expands or enters a recession.

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