Question

4) PVE, Inc. has $15 million of debt outstanding with a coupon rate of 9%. Currently, the yield to maturity on these bonds is 7%. If the firm's tax rate is 35%, what is the after-tax cost of debt to PVE?
A) 10.76%
B) 5.85%
C) 4.55%
D) 5.4%

5) The expected dividend is $2.50 for a share of stock priced at $25. What is the cost of common equity if the long-term growth in dividends is projected to be 4%?
A) 10%
B) 8%
C) 14%
D) 18%

6) Sonderson Corporation is undertaking a capital budgeting analysis. The firm's beta is 1.5. The rate on 10 year T-Bonds is 1.6% and the return on the S&P 500 index is 8%. What is the appropriate cost of common equity in determining the firm's cost of capital?
A) 12.0%
B) 11.2%
C) 13.6%
D) 9.6%

9) Toujours 29 has the following record of paying dividends:
2013 $1.29 2014 $1.33 2015 $1.37 2016 $1.41 2017 $1.45
What are the arithmetic and geometric average growth rates of DIY's dividend payments?
A) 2.97%, 2.97%
B) 29.00%, 28.5%
C) 3.87%, 3.86%
D) 4.55%, 4.49%

10) A firm has an issue of preferred stock that pays an annual dividend of $2.00 per share and currently is selling for $18.50 per share. Finally, the firm's marginal tax rate is 34%. This firm's cost of financing with new preferred stock is
A) 10%.
B) 7.13%.
C) 10.81%.
D) 6.6%.

Answer 1

4). After-tax kD = YTM x (1 - t) = 7% x (1 - 0.35) = 4.55%

Hence, Option "C" is correct.

5). kE = [D1 / P0] + g

= [$2.5/$25] + 0.04 = 0.10 + 0.04 = 0.14, or 14%

Hence, Option "C" is correct.

6). kE = rF + beta[E(rm) - rF]

= 1.6% + 1.5[8% - 1.6%] = 1.6% + 9.6% = 11.2%

Hence, Option "B" is correct.

9).

Year	Dividend Rate	Growth Rate
2013	$1.29
2014	$1.33	(1.33-1.29)/1.29=3.10%
2015	$1.37	(1.37-1.33)/1.33=3.01%
2016	$1.41	(1.41-1.37)/1.37=2.92%
2017	$1.45	(1.45-1.41)/1.41=2.84%

Arithmetic Mean = [g1 + g2 + g3 + g4] / 4

= [3.10% + 3.01% + 2.92% + 2.84%] / 4 = 11.87%/4 = 2.97%

Geometric Mean = [(1 + g1) x (1 + g2) x (1 + g3) x (1 + g4)]^1/4 - 1

= [(1.031) x (1.0301) x (1.0292) x (1.0284)] ^1/4- 1 = [1.1240]^0.25 - 1 = 1.0297 - 1 = 0.0297, or 2.97%

Hence, Option "Ä" is correct.

10). kP = Annual Dividend / Current Market Price = $2 / $18.5 = 0.1081, or 10.81%

Hence, Option "C" is correct.