1.      Bosio Inc.’s perpetual preferred stock sells for $97.50 per share, and it pays an $8.50 annual dividend. If the company were to sell a new preferred issue, it would incur a flotation cost of 4.00% of the price paid by investors. What is the company’s cost of preferred stock for use in calculating the WACC?

2.      Assume that you are on the financial staff of Vanderheiden Inc., and you have collected the following data: The yield on the company’s outstanding bonds is 7.75%; its tax rate is 40%; the next expected dividend is $0.65 a share; the dividend is expected to grow at a constant rate of 6.00% a year; the price of the stock is $15.00 per share; the flotation cost for selling new shares is F = 10%; and the target capital structure is 45% debt and 55% common equity. What is the firm’s WACC, assuming it must issue new stock to finance its capital budget?

3. For a typical firm, which of the following sequences is CORRECT? All rates are after taxes, and assume that the firm operates at its target capital structure.

 

4.      Multi-Part 9-1:
Assume that you have been hired as a consultant by CGT, a major producer of chemicals and plastics, including plastic grocery bags, styrofoam cups, and fertilizers, to estimate the firm’s weighted average cost of capital. The balance sheet and some other information are provided below.

Assets  
Current assets $  38,000,000
Net plant, property, and equipment   101,000,000
Total assets $139,000,000
   
Liabilities and Equity  
Accounts payable $  10,000,000
Accruals       9,000,000
Current liabilities $  19,000,000
Long-term debt (40,000 bonds, $1,000 par value)     40,000,000
Total liabilities $  59,000,000
Common stock (10,000,000 shares) 30,000,000
Retained earnings     50,000,000
Total shareholders’ equity     80,000,000
Total liabilities and shareholders’ equity $139,000,000

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