Problem 12-23 Calculating the Cost of Equity [LO 1]

Pierce Industries stock has a beta of 1.26. The company justpaid a dividend of $.76, and the dividends are expected to grow at5.1 percent. The expected return on the market is 11.6 percent, andTreasury bills are yielding 5.1 percent. The most recent stockprice is $81.25.

a. Calculate the cost of equity using the dividendgrowth model method. (Do not round intermediatecalculations and enter your answer as a percent rounded to 2decimal places, e.g., 32.16.)
  
Cost of equity            %

b. Calculate the cost of equity using the SMLmethod. (Do not round intermediate calculations and enteryour answer as a percent rounded to 2 decimal places, e.g.,32.16.)
  
Cost of equity            %

Problem 12-21 WACC and NPV [LO 4]

Hankins, Inc., is considering a project that will result ininitial aftertax cash savings of $5.6 million at the end of thefirst year, and these savings will grow at a rate of 3 percent peryear indefinitely. The firm has a target debt–equity ratio of .55,a cost of equity of 13 percent, and an aftertax cost of debt of 6.4percent. The cost-saving proposal is somewhat riskier than theusual project the firm undertakes; management uses the subjectiveapproach and applies an adjustment factor of +1 percent to the costof capital for such risky projects.

Calculate the WACC. (Do not round intermediate calculationsand enter your answer as a percent rounded to 2 decimal places,e.g., 32.16.)
  
WACC            %

What is the maximum cost the company would be willing to pay forthis project? (Do not round intermediate calculations andround your answer to 2 decimal places, e.g., 32.16.)
  
Present value           $

Problem 11-25 Portfolio Returns and Deviations [LO 1, 2]

Consider the following information on a portfolio of threestocks:

State of	Probability of			Stock A			Stock B			Stock C
Economy	State of Economy			Rate of Return			Rate of Return			Rate of Return
Boom		.15			.02			.32			.60
Normal		.55			.10			.12			.20
Bust		.30			.16		?	.11		?	.35

a. If your portfolio is invested 40 percenteach in A and B and 20 percent in C, what is the portfolio’sexpected return, the variance, and the standard deviation?(Do not round intermediate calculations. Round yourvariance answer to 5 decimal places, e.g., 32.16161. Enter yourother answers as a percent rounded to 2 decimal places, e.g.,32.16.)

Expected return		%
Variance
Standard deviation		%

b. If the expected T-bill rate is 3.75 percent,what is the expected risk premium on the portfolio? (Do notround intermediate calculations and enter your answer as a percentrounded to 2 decimal places, e.g., 32.16.)

Expected risk premium            %