1) Chicago Paints Corporation has target capital of structure of= 40% debt and 60% common equity. Company expects to have= $600 of after-tax income in coming year, and it plans to retain= 40% of its earnings. Present stock price is: P0=$30, the last dividend paid was D0=$2.00, and dividend is expected to rise at a constant rate of= 7%. New stock can be sold at the flotation cost of: F=25%. Compute the Chicago Pants' marginal cost of equity capital be if it increase a total of= $500 of new capital?
2) HL and LL are equal forms except for their capital structures. Each has= $20 million in assets, earned= $4 million before interest and taxes in 2012, and has 40% marginal tax rate. Firm HL has the Debt/Assets ratio of= 50% and parts 12% interest on its debt, while LL has 30% debt/assets ratio and pays only 10% interest on debt. Compute rate of return on equity for each firm.