Reference no: EM132689634

QUESTION 1 Pearson Motors has a target capital structure of 40% debt and 60% common equity, with no preferred stock. The yield to maturity on the company's outstanding bonds is 12%, and its tax rate is 25%. Pearson's CFO estimates that the company's WACC is 10.80%. What is Pearson's cost of common equity? Do not round intermediate calculations. Round your answer to two decimal places.

QUESTION 2 Jarett & Sons's common stock currently trades at $27.00 a share. It is expected to pay an annual dividend of $1.75 a share at the end of the year (D1 = $1.75), and the constant growth rate is 8% a year.

-What is the company's cost of common equity if all of its equity comes from retained earnings? Do not round intermediate calculations. Round your answer to two decimal places. %

-If the company issued new stock, it would incur a 15% flotation cost. What would be the cost of equity from new stock? Do not round intermediate calculations. Round your answer to two decimal places. %

QUESTION 3 The future earnings, dividends, and common stock price of Callahan Technologies Inc. are expected to grow 5% per year. Callahan's common stock currently sells for $27.50 per share; its last dividend was $2.00; and it will pay a $2.10 dividend at the end of the current year.

-Using the DCF approach, what is its cost of common equity? Do not round intermediate calculations. Round your answer to two decimal places. %

-If the firm's beta is 2.2, the risk-free rate is 7%, and the average return on the market is 12%, what will be the firm's cost of common equity using the CAPM approach? Round your answer to two decimal places. %

-If the firm's bonds earn a return of 11%, based on the bond-yield-plus-risk-premium approach, what will be rs? Use the midpoint of the risk premium range discussed in Section 10-5 in your calculations. Round your answer to two decimal places. %

-If you have equal confidence in the inputs used for the three approaches, what is your estimate of Callahan's cost of common equity? Do not round intermediate calculations. Round your answer to two decimal places.%