## What is the company’s WACC using internal equity (retained earnings)?

## What is the company’s WACC using internal equity (retained earnings)?

1. A firm’s stock has a beta of 0.9; the expected return on the market is 10%; and the risk-free

rate is 5%. What is the expected rate of return on this stock?

2. A firm’s stock has a beta of 1.2; the expected return on the market is 14%; and the risk-free

rate is 4%. What is the expected rate of return on this stock?

3. The Mountaineer Airline Company has consulted with its investment bankers and determined

that they could issue new debt with a yield of 8%. If Mountaineer ‘ marginal tax rate is 39%,

what is the after-tax cost of debt to Mountaineer?

4. The Blue Dog Company has common stock outstanding that has a current price of $20 per

share and a $0.50 dividend. Blue Dog’s dividends are expected to grow at a rate of 3% per

year, forever. The expected risk-free rate of interest is 2.5%, whereas the expected market risk

premium is 5%. The beta on Blue Dog’s stock is 1.2.

a. What is the cost of equity for Blue Dog using the dividend valuation model?

b. What is the cost of equity for Blue Dog using the capital asset pricing model?

5. Given the following data for Water’s Beginning firm:

– 1 million shares of common stock outstanding: price $12 per

share.

– The firm’s outstanding bonds have ten years to maturity, a total

face value of debt = $5 million, face value per bond of $1,000,

current price = $985 with a coupon rate of 10%.

– The risk-free rate is 7%, and analysts’ expected return for the

market is 14%.

– Water’s Beginning stock has a beta of 1.2 and is in the 34%

marginal tax bracket.

– What’s the WACC?

6. Johnson Industries finances its projects with 40% debt, 10% preferred stock and 50%

common stock.

The company can issue bonds at a YTM of 8.4%

The cost of preferred stock is 9%.

The company’s common stock currently sells for $30 per share.

Next years dividend is expected to be $2.12 and is expected to grow at 6%per year

indefinitely.

The company’s tax rate is 30%.

What is the company’s WACC using internal equity (retained earnings)?

7. AMR, parent company of American Airlines, is considering buying a fleet of new planes.

the CFO, wants to know what the firm’s cost of capital is going to be before

the company makes a decision. AMR is currently capitalized with 40% debt, 50% equity,

and 10% preferred stock and has no plans to change these percentages. AMR bonds

($1000 maturity value) currently sell for $949, have 16 years to maturity, and have a 12%

coupon rate with interest paid annually. AMR’s preferred stock currently sells for

$80 and has an annual dividend of $11. AMR’s common stock has a current price of $85

and next year’s dividend is expected to be $7. The firm’s earnings and dividends are

expected to grow at an annual rate of 6.5% indefinitely. The firm’s marginal tax rate is

40%. What is the firm’s cost of capital (WACC) using internal equity?