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    Weighted average cost of capital

    EXAMPLE OF SETUP FOR PROBLEM 18:

    (1) Cost (after-tax) (2) Weights (3) Weighted Cost
    Debt Kd
    Preferred stock Kp
    Common equity (retained Ke
    earnings)
    Weighted average cost of Ka
    Capital

    Problem 18:
    Debt 30%
    Preferred stock 15
    Common equity 55

    Additional information:
    Bond coupon rate 13%
    Bond yield to maturity 11%
    Dividend, expected common $3.00
    Dividend, preferred $10.00
    Price, common $50.00
    Price, preferred $98.00
    Flotation cost, preferred $5.50
    Growth rate 8%
    Corporate tax rate 30%

    10. The shares of the Dyer Drilling Co. sell for $60. The firm has a P/E ratio of 15.
    Forty percent of earnings is paid out in dividends. What is the firm's dividend
    yield?

    12. Stan Pearl owns 300 shares of Royal Optical Company stock, which he bought for $16 per share.
    He is in a 35 percent tax bracket. It is the first week in December, and he has already received the
    Full cash dividend for the year of $1.20 per share. For his tax bracket, dividends are now taxed
    At 15 percent. The stock is currently selling for 301/8. He has decided to sell the stock and
    After paying broker commissions, his net proceeds will be $30 per share. His tax rate on
    Capital gains is also 15 percent (the capital gains are long-term).

    Page 2

    4. The bonds of Goldman Sack Co. have a conversion premium of $55. Their
    conversion price is $40. The common stock price is $42. What is the price of
    the convertible bonds?

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