1. Burnwood Tech plans to issue some $60 par preferred stock with a 5% dividend. A similar stock is selling on the market for $56. Burnwood must pay flotation costs of 5% of the issue price. What is the cost of the preferred stock? Round your answer to two decimal places. 2. Booher Book Stores has a beta of 1.2. The yield on a 3-month T-bill is 3.5% and the yield on a 10-year T-bond is 6%. The market risk premium is 5%. What is the estimated cost of common equity using the CAPM? Round your answer to two decimal places. 3. The earnings, dividends, and common stock price of Shelby Inc. are expected to grow at 4% per year in the future. Shelby’s common stock sells for $26.75 per share, its last dividend was $1.50, and the company will pay a dividend of $1.56 at the end of the current year. a Using the discounted cash flow approach, what is its cost of equity? Round your answer to two decimal places. b If the firm’s beta is 2.1, the risk-free rate is 6%, and the expected return on the market is 14%, then what would be the firm’s cost of equity based on the CAPM approach? Round your answer to two decimal places. c If the firm’s bonds earn a return of 8%, and analysts estimate the market risk premium is 3 to 5 percent, then what would be your estimate of rs using the over-own-bond-yield-plus-judgmental-risk-premium approach? Round your answer to two decimal places. (Hint: Use the midpoint of the risk premium range). d On the basis of the results of parts a through c, what would be your estimate of Shelby’s cost of equity? Assume Shelby values each approach equally. Round your answer to two decimal places. 4. Radon Homes’s current EPS is $7.53. It was $3.83 5 years ago. The company pays out 50% of its earnings as dividends, and the stock sells for $38. Calculate the historical growth rate in earnings. (Hint: This is a 5-year growth period.) Round your answer to two decimal places. Calculate the next expected dividend per share, D1 (Hint: D0 = 0.50($7.53) = $3.77). Assume that the past growth rate will continue. Round your answer to the nearest cent. What is Radon’s cost of equity, rs? Round your answer to two decimal

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