Question

1. Common shares of Leon's Furniture Limited have a beta of 0.465 The market risk premium...

1. Common shares of Leon's Furniture Limited have a beta of 0.465

The market risk premium is 9 percent, and T-bills are currently yielding 1.63 percent.

The firm paid dividends totalling $0.56 in the past 12 months ($0.14 quarterly), and dividends are expected to grow at a 2 percent annual rate indefinitely.

If the stock trades for $14.90 per share, what is your best estimate of the firm's cost of equity?

2. Assuming Leon's Furniture Limited also has an issue of preferred stock with a $0.50 stated dividend that just sold for $10 per share.

What is the firm's cost of preferred stock?

3. Leon's Furniture Limited has $190 million of long-term revolving debt carrying an effective annual interest rate of 4.2%.

The market value of the debt is 100 percent of its face value.

The firm's marginal corporate tax rate is 26.51 percent.

What is the after-tax cost of debt?

4. Use the costs you calcuated in Q1, Q2, and Q3, with the following information:

Leon's Furniture Limited has 82.9 million shares of common equity outstanding.

Assume the firm also has 50 million preferred shares outstanding.

The market value of the firm's debt is 194 million.

What is the total market value of the firm?

What are the capital structure weights?

What is the firm's WACC?

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