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Homework answers / question archive / The Hen House is expected to pay an annual dividend of $2
The Hen House is expected to pay an annual dividend of $2.2 a share next year. The company recently announced that future dividends will increase by 4 percent annually. The market price is $50 a share. What is the cost of equity? 8.40% 8.58% O 4.62%
Cobblestone Tours has 10,000 bonds that are currently quoted at 93.6. The bonds have a 8 percent annual coupon and 10% yield to maturity. What is Cobblestone Tour's after-tax cost of debt if the applicable tax rate is 40 percent? 4.8% 10% 6%
AP Restaurant's cost of equity is 15.3 percent and its after-tax cost of debt is 6.1 percent. What is the firm's weighted average cost of capital if it uses 60% equity and 40% debt? 9.78% 27.02% O 11.62%
BY Restaurant's cost of equity is 15 percent and its after-tax cost of debt is 8 percent. What is the firm's weighted average cost of capital if it uses 65% equity and 35% debt? O 12.55% O 32.16% 10.45%
First question: Hen House stock:
Cost of equity= (D1/P0)+g
Where D1= Dividend next year, P0= Current price and g= constant growth rate of dividend
Given, D1= $2.2, P0= $60 and g= 4%
Plugging the inputs,
Cost of equity= (2.2/50)+0.04
=0.044 + 0.04 = 0.084 Or, 8.40%
Answer is the first choice given.
Second question: Cubblestone Tours:
After-tax cost of debt= YTM*(1-Tax rate)
Give, Yield to maturity (YTM)= 10% and tax rate =40%
Plugging the inputs,
After-tax cost of debt= 10%*(1-40%)
=0.1*0.6= 0.06 Or, 6%
Answer is the third choice given.
Third question: AP Restaurant:
Weighted Average cost of debt (WACC)= We*Re + Wd*Rd
Where We= Weight of equity, Re= Cost of equity, Wd= Weight of dent and Rd= After-tax cost of debt.
Given,
We= 60%, Re= 15.3%, Wd= 40% and Rd= 6.1%
Plugging the inputs,
WACC= 0.6*0.153 + 0.4*0.061
=0.0918+0.0244 = 0.1162 Or, 11.62%
Answer is the third choice given.
Fourth question: BY Restaurant:
Weighted Average cost of debt (WACC)= We*Re + Wd*Rd
Where We= Weight of equity, Re= Cost of equity, Wd= Weight of dent and Rd= After-tax cost of debt.
Given,
We= 65%, Re= 15%, Wd= 35% and Rd= 8%
Plugging the inputs,
WACC= 0.65*0.15 + 0.35*0.08
=0.0975 + 0.028 = 0.1255 Or, 12.55%
Answer is the first choice given.
