Assignment on WACC

Q#01: Silicon Wafer Company currently pays a dividend of $1 per share and has a share price of
$20.

a. If this dividend was expected to grow at a 12 percent rate forever, what is the firm’s
expected, or required, return on equity using a dividend discount model approach?

b. Instead of the situation in Part (a), suppose that the dividend was expected to grow at a
20 percent rate for five years and at 10 percent per year thereafter. Now what is the firm’s
expected, or required, return on equity?

Q#02: Using the capital-asset pricing model, determine the required return on equity for the
following situations:

Q#03: Humble Manufacturing is interested in measuring its overall cost of capital. The firm is in the
40% tax bracket. Current investigation has gathered the following data:
Debt: The firm can raise debt by selling $1,000-par-value, 10% coupon interest rate, 10-year
bonds on which annual interest payments will be made. To sell the issue, an average discount of
$30 per bond must be given, which means that the selling price for each bond will be $970
($1000-$30).
Preferred stock: The firm can sell 11% (annual dividend) preferred stock at its $100-per-share
par value. The cost of issuing and selling the preferred stock is expected to be $4 per share, which
means that the selling price for each preferred share will be $96 ($100-$4).
Common stock: The firm’s common stock is currently selling for $80 per share. The firm
expects to pay cash dividends of $6 per share next year. The firm’s dividends have been growing
at an annual rate of 6%, and this rate is expected to continue in the future.
Required:
a. Calculate the individual cost of each source of financing (Debt, Preferred Stock, and
Common Stock).
b. Calculate the firm’s weighted average cost of capital using the weights of Debt = 30%,
Preferred stock = 20%, Common stock = 50%.