Chapter 14 - Cost of Capital
41. The Shoe Outlet has paid annual dividends of $0.65, $0.70, $0.72, and $0.75 per share over the last four years, respectively. The stock is currently selling for $26 a share. What is this firm's cost of equity? A. 7.56 percent B. 7.93 percent C. 10.38 percent D. 10.53 percent E. 11.79 percent
($0.70 - $0.65)/$0.65 = 0.076923 ($0.72 - $0.70)/$0.70 = 0.028571 ($0.75 - $0.72)/$0.72 = 0.041667
g = (0.076923 + 0.028571 + 0.041667)/3 = .049054 Re = [($0.75 ? 1.049054)/$26] + .049054 = 7.93 percent
AACSB: Analytic Bloom's: Application Difficulty: Basic
Learning Objective: 14-1 Section: 14.2
Topic: Cost of equity
42. Sweet Treats common stock is currently priced at $19.06 a share. The company just paid $1.15 per share as its annual dividend. The dividends have been increasing by 2.5 percent annually and are expected to continue doing the same. What is this firm's cost of equity? A. 6.03 percent B. 6.18 percent C. 8.47 percent D. 8.68 percent E. 8.82 percent
e = [($1.15 ? 1.025)/$19.06] + 0.025 = 8.68 percent
AACSB: Analytic Bloom's: Application Difficulty: Basic
Learning Objective: 14-1 Section: 14.2
Topic: Cost of equity
14-21
Chapter 14 - Cost of Capital
43. The common stock of Metal Molds has a negative growth rate of 1.5 percent and a required return of 18 percent. The current stock price is $11.40. What was the amount of the last dividend paid? A. $2.07 B. $2.11 C. $2.19 D. $2.22 E. $2.26
D1 = [(0.18 - (-0.015)) ? $11.40] = $2.223; D0 = $2.223/(1 - 0.015) = $2.26
AACSB: Analytic Bloom's: Application Difficulty: Basic
Learning Objective: 14-1 Section: 14.2
Topic: Dividend growth
44. Highway Express has paid annual dividends of $1.16, $1.20, $1.25, $1.10, and $0.95 over the past five years respectively. What is the average dividend growth rate? A. -4.51 percent B. -3.60 percent C. 2.28 percent D. 2.47 percent E. 4.39 percent
($1.20 - $1.16)/$1.16 = 0.034483 ($1.25 - $1.20)/$1.20 = 0.041667 ($1.10 - $1.25)/$1.25 = -0.12 ($0.95 - $1.10)/$1.10 = -0.136364
g = (0.034483 + 0.041667 - 0.12 - 0.136364)/4 = -4.51 percent
AACSB: Analytic Bloom's: Application Difficulty: Basic
Learning Objective: 14-1 Section: 14.2
Topic: Dividend growth
14-22
Chapter 14 - Cost of Capital
45. Southern Home Cookin' just paid its annual dividend of $0.65 a share. The stock has a market price of $13 and a beta of 1.12. The return on the U.S. Treasury bill is 2.5 percent and the market risk premium is 6.8 percent. What is the cost of equity? A. 9.98 percent B. 10.04 percent C. 10.12 percent D. 10.37 percent E. 10.45 percent
Re = 0.025 + (1.12 ? 0.068) = 10.12 percent
AACSB: Analytic Bloom's: Application Difficulty: Basic
Learning Objective: 14-1 Section: 14.2
Topic: Cost of equity
46. National Home Rentals has a beta of 1.38, a stock price of $19, and recently paid an annual dividend of $0.94 a share. The dividend growth rate is 4.5 percent. The market has a 10.6 percent rate of return and a risk premium of 7.5 percent. What is the firm's cost of equity? A. 7.05 percent B. 8.67 percent C. 9.13 percent D. 10.30 percent E. 11.56 percent
Re = (0.106 - 0.075) + (1.38 ? 0.075) = 0.1345 Re = [($0.94 ? 1.045)/$19] + 0.045 = 0.0967 Re Average = (0.1345 + 0.0967)/2 = 11.56 percent
AACSB: Analytic Bloom's: Application Difficulty: Basic
Learning Objective: 14-1 Section: 14.2
Topic: Cost of equity
14-23
Chapter 14 - Cost of Capital
47. Henessey Markets has a growth rate of 4.8 percent and is equally as risky as the market. The stock is currently selling for $17 a share. The overall stock market has a 10.6 percent rate of return and a risk premium of 8.7 percent. What is the expected rate of return on this stock? A. 8.7 percent B. 9.2 percent C. 10.6 percent D. 11.3 percent E. 11.7 percent
Re = (0.106 - 0.087) + (1.00 ? 0.087) = 10.6 percent
AACSB: Analytic Bloom's: Application Difficulty: Basic
Learning Objective: 14-1 Section: 14.2
Topic: Cost of equity
48. Tidewater Fishing has a current beta of 1.48. The market risk premium is 8.9 percent and the risk-free rate of return is 3.2 percent. By how much will the cost of equity increase if the company expands its operations such that the company beta rises to 1.60? A. 0.88 percent B. 1.07 percent C. 1.50 percent D. 2.10 percent E. 2.26 percent
Increase in cost of equity = (1.60 - 1.48) ? 0.089 = 1.07 percent
AACSB: Analytic Bloom's: Application Difficulty: Basic
Learning Objective: 14-1 Section: 14.2
Topic: Cost of equity
14-24
Chapter 14 - Cost of Capital
49. Wind Power Systems has 20-year, semi-annual bonds outstanding with a 5 percent coupon. The face amount of each bond is $1,000. These bonds are currently selling for 114 percent of face value. What is the company's pre-tax cost of debt? A. 3.98 percent B. 4.42 percent C. 4.71 percent D. 5.36 percent E. 5.55 percent
AACSB: Analytic Bloom's: Application Difficulty: Basic
Learning Objective: 14-2 Section: 14.3
Topic: Cost of debt
50. Boulder Furniture has bonds outstanding that mature in 13 years, have a 6 percent coupon, and pay interest annually. These bonds have a face value of $1,000 and a current market price of $1,040. What is the company's aftertax cost of debt if its tax rate is 32 percent? A. 2.97 percent B. 3.24 percent C. 3.78 percent D. 5.21 percent E. 5.53 percent
AACSB: Analytic Bloom's: Application Difficulty: Basic
Learning Objective: 14-2 Section: 14.3
Topic: Cost of debt
14-25
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