1.

Shi Importers' balance sheet shows $300 million in debt, $50 million in preferred stock, and $250 million in total commo
equity. Shi faces a 40% tax rate and the following data: rd = 6%, rps = 5.8%, and rs = 12%. If Shi has a target capital
structure of 30% debt, 5% preferred stock, and 65% common stock, what is Shi's WACC?

WACC = rd(1-tax rate) X weight of debt + rsp X weight of preferred stock + rs X weight of common stock
WACC = 3.6% X 30% + 5.8% X 5% + 12% X 65%
WACC = 1.08 + 0.29 + 7.8
WACC = 9.17

2. Radon Homes' current EPS is $6.50. It was $4.42 five years ago. The company pays out 40% of its earnings as dividend
and the stock sells for $36. a) Calculate the past growth rate in earnings. (Hint: This is a 5-year growth period.)

Growth rate = (Price Five years back / Current Price)^(1/number of years) - 1

Growth rate = (6.5 / 4.42) ^ (1/5) - 1
Growth rate = 8.02%

b) Calculate the next expected dividend per share, D1[D0=0.4($6.50)=$2.60]. Assume that the past growth rate will continue.

D1 = D0 X (1 + Growth)
D1 = 2.6 X (1 + 8.02%)
D1 = 2.81

c) What is the cost of equity, rs, for Radon Homes?

Cost of equity = D1 / P0 + Growth

Cost of equity = 2.81 / 36 + 8.02%
Cost of equity = 15.83%
 $250 million in total common
If Shi has a target capital

s X weight of common stock

% of its earnings as dividends,

ar growth period.)

ast growth rate will continue.