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1) Shaggy Dog Corp has established a target capital structure of 40% debt and 60% common equity

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1) Shaggy Dog Corp has established a target capital structure of 40% debt and 60% common

equity. The firm expects to earn $600 in after-tax income during the coming year, and to retain 40% of those earnings. The current market price of the firm's stock is $28; its last dividend was D0 = $2.20, and its expected growth rate is 6 percent. Shaggy Dog can issue new common stock at a 15% flotation cost. What will Shaggy's marginal cost of equity capital be if it must fund a capital budget requiring $600 in total new capital?

2) Suppose a firm has a bond issue currently outstanding that has 27 years left to maturity. The coupon rate is 7.25% and coupons are paid semi-annually. The bond is currently selling for $975 per $1,000 bond. The firm faces a 40% tax rate. What is the firm's after tax cost of debt?