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# Cost of equity and WACC

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10- 2 COST OF PREFERRED STOCK
Tunney Industries can issue perpetual preferred stock at a price of \$ 47.50 a share. The stock would pay a constant annual dividend of \$ 3.80 a share. What is the company's cost of preferred stock, rp?

10- 4 COST OF EQUITY WITH AND WITHOUT FLOTATION
Javits & Sons' common stock currently trades at \$ 30.00 a share. It is expected to pay an annual dividend of \$ 3.00 a share at the end of the year ( D1 =\$ 3.00), and the constant growth rate is 5% a year.
a. What is the company's cost of common equity if all of its equity comes from retained earnings?
b. If the company issued new stock, it would incur a 10% flotation cost. What would be the cost of equity from new stock?

10- 7 COST OF COMMON EQUITY WITH AND WITHOUT FLOTATION
The Evanec Company's next expected dividend, D1, is \$ 3.18; its growth rate is 6%; and its common stock now sells for \$ 36.00. New stock ( external equity) can be sold to net \$ 32.40 per share.
a. What is Evanec's cost of retained earnings, rs?
b. What is Evanec's percentage flotation cost, F?
c. What is Evanec's cost of new common stock, re?

10- 8 COST OF COMMON EQUITY AND WACC
Patton Paints Corporation has a target capital structure of 40% debt and 60% common equity, with no preferred stock. It's before- tax cost of debt is 12%, and its marginal tax rate is 40%. The current stock price is P0 = \$ 22.50. The last dividend was D0 = \$ 2.00, and it is expected to grow at a 7% constant rate. What is its cost of common equity and it's WACC?

#### Solution Preview

10-2
Preferred stock is a perpetuity. For a perpetuity, the cost is given as Annual Dividend/Price
Cost of preferred stock = 3.80/47.50 = 8.0%

10-4
a. Using the constant growth formula,
Cost of equity = D1/P0 + g
where D1 = expected dividend = \$3.00, P0 = ...

#### Solution Summary

The solution explains how to calculate the cost of preferred stock, common stock and the WACC

\$2.49