Chapter 14 Cost of Capital.

145) E
E(RA) = .04(.097) + .72(.114) + .24(.156)
E(RA) = .1234

.1234 = .031 + βA(.074)
βA = 1.25

E(RB) = .04(.102) + .72(.133) + .24(.148)
E(RB) = .1354

.1354 = .031 + βB(.074)
βB = 1.41

146) E
E(RA) = .21(.189) + .74(.158) + .05(−.246)
E(RA) = .1443, or 14.43%

E(RB) = .21(.097) + .74(.076) + .05(.042)
E(RB) = .0787, or 7.87%

SlopeSML = (.1443 − .0787)/.84
SlopeSML = .0781, or 7.81%


Student name:
1) Judy's Boutique just paid an annual dividend of $2.53 on its common stock. The firm
increases its dividend by 3.30 percent annually. What is the company's cost of equity if the
current stock price is $39.16 per share?
1)


A) 9.76%
B) 9.22%
C) 9.49%
D) 10.35%
E) 9.97%

,Question Details
Section : 14.2 The Cost of Equity
Difficulty : 1 Basic
Topic : Cost of equity
Learning Objective : 14-01 Determine a firm's cost of equity capital.
AACSB : Analytical Thinking
Bloom's : Understand
Accessibility : Keyboard Navigation
Accessibility : Screen Reader Compatible




2) Countess Corporation is expected to pay an annual dividend of $4.21 on its common
stock in one year. The current stock price is $70.47 per share. The company announced that it
will increase its dividend by 3.40 percent annually. What is the company's cost of equity?
2)


A) 9.58%
B) 9.11%
C) 9.94%
D) 8.85%
E) 9.37%



Question Details
Section : 14.2 The Cost of Equity
Difficulty : 1 Basic
Topic : Cost of equity
Learning Objective : 14-01 Determine a firm's cost of equity capital.
AACSB : Analytical Thinking
Bloom's : Understand
Accessibility : Keyboard Navigation
Accessibility : Screen Reader Compatible




3) The stock in Bowie Enterprises has a beta of 1.24. The expected return on the market is
11.20 percent and the risk-free rate is 2.82 percent. What is the required return on the company's
stock?
3)

, A) 13.21%
B) 14.96%
C) 16.71%
D) 12.48%
E) 12.84%



Question Details
Section : 14.2 The Cost of Equity
Difficulty : 1 Basic
Topic : Cost of equity
Learning Objective : 14-01 Determine a firm's cost of equity capital.
AACSB : Analytical Thinking
Bloom's : Understand
Accessibility : Keyboard Navigation
Accessibility : Screen Reader Compatible




4) Smathers Corporation stock has a beta of 1.19. The market risk premium is 7.40 percent
and the risk-free rate is 3.02 percent annually. What is the company's cost of equity?
4)


A) 10.03%
B) 7.77%
C) 8.23%
D) 8.00%
E) 11.83%



Question Details
Section : 14.2 The Cost of Equity
Difficulty : 1 Basic
Topic : Cost of equity
Learning Objective : 14-01 Determine a firm's cost of equity capital.
AACSB : Analytical Thinking
Bloom's : Understand
Accessibility : Keyboard Navigation
Accessibility : Screen Reader Compatible

, 5) Rossdale Company stock currently sells for $68.25 per share and has a beta of .85. The
market risk premium is 7.10 percent and the risk-free rate is 2.85 percent annually. The company
just paid a dividend of $3.45 per share, which it has pledged to increase at an annual rate of 3.10
percent indefinitely. What is your best estimate of the company's cost of equity?
5)


A) 7.53%
B) 6.46%
C) 8.60%
D) 9.26%
E) 6.04%



Question Details
Section : 14.2 The Cost of Equity
Difficulty : 1 Basic
Topic : Cost of equity
Learning Objective : 14-01 Determine a firm's cost of equity capital.
AACSB : Analytical Thinking
Bloom's : Understand
Accessibility : Keyboard Navigation
Accessibility : Screen Reader Compatible




6) Bethesda Water has an issue of preferred stock outstanding with a coupon rate of 4.00
percent that sells for $90.22 per share. If the par value is $100, what is the cost of thecompany's
preferred stock?
6)


A) 4.12%
B) 4.80%
C) 4.43%
D) 4.25%
E) 4.00%