Reference no: EM132975703

Questions -

Q1. Diao Corporation is estimating its cost of preferred stock. It has outstanding a $100 face value issue that pays a $11 annual dividend and is currently selling for $105.00. Diao would pay a 5% flotation cost to issue new preferred stock and pays income taxes at a 21% rate.

a) Determine the preferred stock investors' required rate of return?

b) Determine the cost of a new issue of preferred stock to Diao Corporation.

Q2. Diouf Corporation is estimating its cost of common stock financing. Financial analysts are forecasting that Diouf's next dividend will be $2.50, and that the dividend will grow at a rate of 8% for the foreseeable future. The company's stock is currently selling for $50/share. Diouf's investment bankers have advised that a new stock issue would incur flotation costs of 6% of the issue.

a) Determine the common stock investors' required rate of return

b) Determine the cost of retained earnings to Diouf Corporation.

c) Determine the cost of a new stock issue to Diouf Corporation.

Q3. Edu Company's finances itself only with bonds and common stock. Its shareholders require a 22.5% return, and its bondholders require a 14% return. Based on a 50% debt ratio, no flotation costs, and a 21% tax rate, find Edu's weighted-average cost of capital (WACC).