The Dempere Imports Company s EPS in 2014 was 1 85

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The Dempere Imports Company's EPS in 2014 was $1.85, and in 2009 it was $1.12. The
company's payout ratio is 40%, and the stock is currently valued at $62.35. Flotation costs for
new equity will be 12%. Net income in 2015 is expected to be $15 million.The company's
investment banker estimates that it could sell 10-year semiannual bonds with a coupon rate of
7%. The face value would be $1,000 and the flotation costs for a bond issue would be 3%. The
market-value weights of the firm's debt and equity are 30% and 70%, respectively. The firm
faces a 35% tax rate.a. Based on the five-year track record, what is Dempere's EPS growth
rate? What will the dividend be in 2015?b. Calculate the firm's cost of retained earnings and the
cost of new common equity.c. Calculate the break-point associated with retained earnings.d.
What is the firm's after-tax cost of new debt?e. If Dempere's after-tax cost of debt is 6%, what is
the WACC with retained earnings? With new common equity?f. Create a scatter chart that
shows the firm's marginal WACC as a step function. The x-axis should go to at least $20 million.
Be sure to fully label the chart, including a data label with leader lines that shows the value of
the break-point.View Solution:
The Dempere Imports Company s EPS in 2014 was 1 85 and

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