# Suppose In a Found Ltd. just issued a dividend of $2.59 per share

Question 1. Suppose In a Found Ltd. just issued a dividend of $2.59 per share on its common stock. The company paid dividends of $2.25, $2.34, $2.41, and $2.52 per share in the last four years.If the stock currently sells for $70, what is your best estimate of the company’s cost of equity capital using the arithmetic average growth rate in dividends?What if you use the geometric average growth rate?Question 2. Holdup Bank has an issue of preferred stock with a $4.95 stated dividend that just sold for $86 per share. What is the bank’s cost of preferred stockQuestion 3.Mudvayne, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 18 years to maturity that is quoted at 106 percent of face value. The issue makes semiannual payments and has an embedded cost of 5 percent annually.What is the company’s pretax cost of debtIf the tax rate is 35 percent, what is the aftertax cost of debtQuestion 4.Mullineaux Corporation has a target capital structure of 75 percent common stock, 15 percent preferred stock, and 10 percent debt. Its cost of equity is 8 percent, the cost of preferred stock is 4 percent, and the pretax cost of debt is 5 percent. The relevant tax rate is 30 percent.a. What is Mullineaux’s WACC?b. What is the aftertax cost of debtQuestion 5. Fama’s Llamas has a weighted average cost of capital of 10.9 percent. The company’s cost of equity is 12 percent, and its pretax cost of debt is 8.9 percent. The tax rate is 38 percent. What is the company’s target debt?equity ratio?(Do not round intermediate calculations and round your final answer to 4 decimal places. (e.g., 32.1616))Questions 5.Erna Corp. has 4 million shares of common stock outstanding. The current share price is $83, and the book value per share is $8. Erna Corp. also has two bond issues outstanding. The first bond issue has a face value of $90 million, has a coupon of 6 percent, and sells for 98 percent of par. The second issue has a face value of $60 million, has a coupon of 7 percent, and sells for 106 percent of par. The first issue matures in 21 years, the second in 3 years.a. What are Erna’s capital structure weights on a book value basisb. What are Erna’s capital structure weights on a market value basis?Equity/ValueDebt/Valuec. Which are more relevant, the book or market value weights?Question 6.Suppose your company needs $18 million to build a new assembly line. Your target debt?equity ratio is 0.70. The flotation cost for new equity is 7 percent, but the flotation cost for debt is only 4 percent. Your boss has decided to fund the project by borrowing money because the flotation costs are lower and the needed funds are relatively small.a. What is your company’s weighted average flotation cost, assuming all equity is raised externally?b. What is the true cost of building the new assembly line after taking flotation costs into account? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567. Do not round intermediate calculations and round your final answer to the nearest whole dollar amount.(e.g., 32)Question 7.Pendergast, Inc., has no debt outstanding and a total market value of $180,000. Earnings before interest and taxes, EBIT, are projected to be $23,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 20 percent higher. If there is a recession, then EBIT will be 30 percent lower. Pendergast is considering a $75,000 debt issue with an interest rate of 7 percent. The proceeds will be used to repurchase shares of stock. There are currently 6,000 shares outstanding. Ignore taxes for this problem.a-1 Calculate earnings per share (EPS) under each of the three economic scenarios before any debt is issued. (Round your answers to 2 decimal places. (e.g., 32.16))RecessionNormalExpansiona-2 Calculate the percentage changes in EPS when the economy expands or enters a recession.b-1 Assume that the company goes through with recapitalization. Calculate earnings per share (EPS) under each of the three economic scenarios assuming the company goes through with recapitalization. (Leave no cells blank – be certain to enter “0” wherever required. Round your answers to 2 decimal places. (e.g., 32.16))RecessionNormalExpansionb-2 Given the recapitalization, calculate the percentage changes in EPS when the economy expands or enters a recessionRecessionExpansionQuestion 8Pendergast, Inc., has no debt outstanding and a total market value of $180,000. Earnings before interest and taxes, EBIT, are projected to be $23,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 20 percent higher. If there is a recession, then EBIT will be 30 percent lower. Pendergast is considering a $75,000 debt issue with an interest rate of 7 percent. The proceeds will be used to repurchase shares of stock. There are currently 6,000 shares outstanding. Ignore taxes for questions a and b. Assume the company has a market-to-book ratio of 1.0.a-1 Calculate return on equity (ROE) under each of the three economic scenarios before any debt is issuedRecessionNormalExpansiona-2 Calculate the percentage changes in ROE when the economy expands or enters a recession.Assume the firm goes through with the proposed recapitalizationb-1 Calculate the return on equity (ROE) under each of the three economic scenarios. (Round your answers to 2 decimal places. (e.g., 32.16))b-2 Calculate the percentage changes in ROE when the economy expands or enters a recessionQuestion 9Destin Corp. is comparing two different capital structures. Plan I would result in 10,000 shares of stock and $90,000 in debt. Plan II would result in 7,600 shares of stock and $198,000 in debt. The interest rate on the debt is 10 percent. Assume that EBIT will be $48,000. An all-equity plan would result in 12,000 shares of stock outstanding. Ignore taxes.What is the price per share of equity under Plan I? Plan II?Question 10STP Corp. uses no debt. The weighted average cost of capital is 8 percent. If the current market value of the equity is $18 million and there are no taxes, what is EBIT?