1. Delta, Inc. has a stock price of $50. In the fiscal year just ended, dividends were $2.00. Earnings per share and dividends are expected to increase at an annual rate of 8 percent. The risk-free rate is 4 percent, the market risk premium is 6.4 percent and the beta on Delta’s stock is 1.25. Delta’s target capital structure is 40% debt and 60% common equity. Delta’s tax rate is 40 percent. New common stock can be sold to net $40 per share after flotation costs. Delta can sell bonds that mature in 25 years with a par value of $1,000 and an 8% coupon rate paid annually for $960. Calculate the after-tax cost of debt financing a. 8.39% b. 5.03% c. 12.0% d. 12.3%.

2. You have the choice of an ordinary annuity or an annuity due. You would pick the ____ because _____.

annuity due; there is more compounding of interest

ordinary annuity; there is more compounding of interest

annuity due; you would receive your money sooner

ordinary annuity; you would receive your money later