Instructions

1.  Under what situations would you want to use the CAPM approach for estimating the component cost of equity? The constant-growth model?
2. Cost of Equity JaiLai Cos. stock has a beta of 1.2, the current risk-free rate is 4.2 percent, and the expected return on the market is 12 percent. What is JaiLai's cost of equity?
3. Cost of Debt KatyDid Clothes has a $250 million (face value) 30-year bond issue selling for 103 percent of par that carries a coupon rate of 7.95 percent, paid semiannually. What would be Katydid's before-tax component cost of debt?
4. Cost of Preferred Stock Marme, Inc. has preferred stock selling for 97.5 percent of par that pays an 8 percent annual coupon. What would be Marme's component cost of preferred?
5. WACC Suppose that JB Cos. has a capital structure of 75 percent equity, 25 percent debt, and that its before-tax cost of debt is 9 percent while its cost of equity is 15 percent. If the appropriate weighted average tax rate is 30 percent, what will be JB's WACC?