1. Suppose a regulated public utility is expected to provide steady (constant) growth ofdividends of 5 percent per year for the indefinite future. Its last dividend was $5 pershare (DIVo = $5.00); the stock sold for $60 in the secondary market just after the $5dividend was paid. What is the company’s cost of equity capital (rs)?2. A company’s CFO wants to maintain a target debt-to-equity ratio of ¼ (this impliesthat D/E = 0.25%). If the WACC is 18.6% and the pre-tax cost of debt is 9.4% what isthe cost of common equity (rs) assuming a tax rate of 34%?3. Suppose a company has 30 000 shares of common stock outstanding at a market price of $15.00 a share. This stock was originally issued at $31 per share. The firm also has a bond issue outstanding with a total face value of $280 000 which is selling for 86 percent of par. The cost of equity is 13 percent while the aftertax cost of debt is 6.9 percent. The firm has a beta of 1.48 and a tax rate of 30 percent. What is the weighted average cost of capital?4. Best Mattress has an overall beta of 0.79 and a cost of equity of 11.2 percent for the firm overall. The firm is 100 percent financed with common stock. Division X within the firm has an estimated beta of 1.08 and is the riskiest of all of the firm’s operations. What is an appropriate cost of capital for Division X if the market risk premium is 9.5 percent?
