Stock Market Analysis: 05/21/09
22) The last paid dividend is $2 for a share of common boutiques near me that is currently selling for $20. Answer: There are two primary advantages of using the CAPM approach to determine the cost of common equity. 51) Discuss the primary advantages of the CAPM approach in determining the cost of common equity. 47) The cost of common equity is already on an after-tax basis since dividends paid to common stockholders are not tax-deductible. What is the cost of common equity if the long-term growth rate in dividends for the firm is expected to be 8%? 45) The cost of debt is equal to one minus the marginal tax rate times the coupon rate of interest on the firm's outstanding debt. 49) It is not possible for a firm's after-tax cost of common equity to be lower than its after-tax cost of debt. This causes the after-tax component of debt in the cost of capital to be less than the required return of the firm's creditors. 44) A firm can estimate its cost of debt by finding the yield on bonds issued by other firms with similar ratings and maturities.
34) The George Company, Inc., has two issues of debt. Common stock: 46,000 shares outstanding currently selling for $50 per share. The cost of a firm's bonds is greater than the cost of its common stock. The cost of a firm's retained earnings is less than the cost of its bonds. The bonds currently sell for $115 per $100 par value. Issue A has a maturity value of 8 million dollars, a coupon rate of 8%, paid annually, and is selling at par. Debt: $3,000,000 par value of 9% bonds outstanding with an annual before-tax yield to maturity of 7.67% on a new issue. This firm's preferred stock is currently selling for $29.89 and pays a perpetual annual dividend of $2.60 per share. The cost of a firm's preferred stock is greater than the cost of its common stock. 40) The firm financed completely with equity capital has a cost of capital equal to the required return on common stock.
33) Paramount, Inc. just paid a dividend of $2.05 per share, and the firm is expected to experience constant growth of 12.50% over the foreseeable future. The most recent dividend per share, paid yesterday, is $2.00. The firm expects to pay a $5.50 dividend per share one year from now and is experiencing a 3.67% growth rate in dividends, which it expects to continue indefinitely. A 10% interest rate thus become (10% × (1-.34)) or 6.6% after taxes. The firm can deduct interest expense before taxes, thus reducing the firm's tax burden. A firm currently has the following capital structure which it intends to maintain. The firm pays dividends annually and expects dividends to grow at a constant rate of 5% indefinitely. 31) Given the following information, determine the risk-free rate. The firm's marginal tax rate is 40%. The company has no plans to issue new securities. The cost of a firm's common stock is greater than the cost of its bonds.













