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Weighted average cost of capital


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

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

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).

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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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