11. A company's preferred stock pays an annual dividend of $7.00 per share.

When issued, the shares

sold for their par value of $100 per share. What is the cost of preferred stock if the current price is
$120 per share?
A) 5.8%
B) 7.0%
C) 8.1%
D) 9.6%
E) 12.0%
Answer: A
Response: $7 / 120 = .058

12. Suppose that your firm has a cost of equity of 18% and a cost of debt of 8%. If the target
debt/equity ratio is 0.60, and the tax rate is 35%, what is the firm's weighted average cost of
capital (WACC)?
A) 7.4%
B) 9.9%
C) 11.8%
D) 13.2%
E) 14.3%
Answer: D
Response: .18(10/16) + .08(6/16)(1-35) = .132

13. Suppose a firm has 19 million shares of common stock outstanding with a par value of $1.00 per
share. The current market price per share is $18.35. The firm has outstanding debt with a par
value of $114.5 million selling at 96% of par. What capital structure weight would you use for
debt when calculating the firm's WACC?
A) 0.15
B) 0.24
C) 0.54
D) 0.76
E) 0.96
Answer: B
Response: V = 19M($18.35) + 114,500($960) = $458,570,000; D/V = $109.92M / 458.57M =
.240

14. A common stock issue is currently selling for $31 per share. You expect the next dividend to be
$1.40 per share. If the firm has a dividend growth rate of 5% that is expected to remain constant
indefinitely, what is the firm's cost of equity?
A) 9.5%
B) 11.3%
C) 13.8%
D) 14.2%
E) 15.1%
Answer: A
Response: ($1.40/31) + .05 = .0952

15. Given the following information, what is the average annual dividend growth rate?

Dividend $1.80 $1.90 $2.15 $2.28 $2.49 $2.75

A) 4.9%
B) 6.2%
C) 8.8%
D) 9.7%
E) 10.3%
Answer: C
Response: ($.10/1.80 + .25/1.90 + .13/2.15 + .21/2.28 + .26/2.49) / 5 = .0888