14. A common stock issue is currently selling for $31 per share.

You expect the next dividend to be

$1.40 per share. If the firm has a dividend growth rate of 5% that is expected to remain constant
indefinitely, what is the firm's cost of equity?
A) 9.5%
B) 11.3%
C) 13.8%
D) 14.2%
E) 15.1%
Answer: A
Response: ($1.40/31) + .05 = .0952

15. Given the following information, what is the average annual dividend growth rate?

Dividend $1.80 $1.90 $2.15 $2.28 $2.49 $2.75

A) 4.9%
B) 6.2%
C) 8.8%
D) 9.7%
E) 10.3%
Answer: C
Response: ($.10/1.80 + .25/1.90 + .13/2.15 + .21/2.28 + .26/2.49) / 5 = .0888

16. Treasury bills currently have a return of 2.5% and the market risk premium is 7%. If a firm has a
beta of 1.4, what is its cost of equity?
A) 8.1%
B) 9.9%
C) 10.8%
D) 12.3%
E) 14.4%
Answer: D
Response: 2.5 + 1.4(7) = 12.3%
17. Your firm sold a 25-year bond at par 19 years ago. The bond pays an 6% annual coupon, has a
$1,000 face value, and currently sells for $825. What is the firm's cost of debt?
A) 6.0%
B) 8.2%
C) 9.5%
D) 10.0%
E) 11.3%
Answer: D
Response: $825 = $60{[1 - 1/(1 + YTM)6] / YTM} + 1,000 / (1 + YTM)6; YTM = 10.02%
6 N, 1000 FV, -825 PV, 60 PMT, CPT I/Y = 10.02%

18. A company has preferred stock outstanding which pays a dividend of $6 per share a year. The
current stock price is $75 per share. What is the cost of preferred stock?
A) 6%
B) 7%
C) 10%
D) 9%
E) 8%
Answer: E
Response: $6 / 75 = .08

19. A firm sold a 10-year bond issue 3 years ago. The bond has a 6.45% annual coupon and a $1,000
face value. If the current market price of the bond is $951.64 and the tax rate is 35%, what is the
aftertax cost of debt?
A) 3.50%
B) 5.99%
C) 6.45%
D) 7.36%
E) 4.78%
Answer: E
Response:
$951.64 = $64.50{[1 - 1/(1 + YTM)7] / YTM} + 1,000 / (1 + YTM) 7; YTM = 7.359%
64.50 PMT, 1000 FV, 7 N, -951.64 PV, CPT I/Y = YTM = Rd=7.359%
After Tax Cost of debt =AT = Before tax Cost of Debt ( 1-tax rate) =7.359(1-.35) = 4.783%

20. Given the following information, what is the firm's weighted average cost of capital? Market
value of equity = $30 million; market value of debt = $20 million; cost of equity = 15%; cost of
debt = 9%; equity beta = 1.4; tax rate = 35%.
A) 11.34%
B) 12.60%
C) 12.97%
D) 13.32%
E) 14.08%
Answer: A
Response: [.15($30M/50M)] + [.09(20M/50M)(1-.35)] = .1134 or 11.34%