1) WACC

Shi Importer’s balance sheet shows $300 million in debt, $50 million in preferred stock, and $250 million in total common equity. Shi’s tax rate is 40%, rd= 6%, rps= 5.8%, and rs =12%. If Shi has a target capital structure of 30% debt, 5% preferred stock, and 65% common stock, what is its WACC?

2) Cost of Equity

Radon Home’s current EPS is $6.50. It was $4.42 5yrs ago. The company pays out 40% of its earnings as dividends, and the stock sells for $36.

Calculate the historical growth rate in earnings. (Hint: This is a 5-year growth period.)

Calculate the next expected dividend per share, D1 (Hint: D0= 0.4 ($6.50) = $2.60.) Assume that the past growth rate will continue.

What is Radon’s cost of equity, rs?