Calculating Cost of Equity
The Graber Corporation’s common stock has a beta of 1.15. If the
risk is 3.5 percent and the expected return on the market is 11 percent, what is the company’s cost of equity capital? PLEASE SHOW ALL WORK.
Estimating the DCF Growth Rate
Suppose Stark, Ltd., just issued a dividend of $2.08 per share on its common stock. The company paid dividend of $1.71, $1.82, $1.93, and $1.99 per share in the last four years. If the stock currently sells for$45, 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? PLEASE SHOW ALL WORK.
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 11 percent, the cost of preferred stock is 5 percent, and the pretax cost of debt is 7 percent. The relevant tax rate is 35 percent. a.) What is Mullineeaux’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 because it costs less than debt. What would you tell the president? PLEASE SHOW ALL WORK.