as per given

Tanner's leather is an all-equity ?nanced ?rm. The beta is 1.15, the market risk premium is 1.52 percent, the market rate of return is 10.64 percent, and the tax rate is 34 percent. The ?rm announced that the next dividend will be $116364 per share and ?iture dividends will increase by 4 percent annually. The stock sells for $13 a share. 1What is the average cost of equity computed by using the dividend growth model and the CAPM model? A. 10.21% B. 10.56% C. 10.63% D. 9.14% E. 9.93% Question 5 Which of these may occur if a ?rm uses its overall cost of capital as the discount rate for all projects? I. Pro?table low-risk projects may he incorrectly rejected. [1. Only projects with risks similar to the current firm will he accepted. [11. Too many hi gh-risk projects may he accepted. IV. Only low-risk projects will he accepted. A. 11 only E. II and W only C. 1 and [II only D. 1 and W only E. 1, [1, and 111 only

Explanation given below

Step-by-step explanation

Answer 4: Cost of equity using dividend growth model = 

Cost of equity(k) = (D1/Po) +g

where, 

D1= dividend for next year = $0.6864

Price of share(Po) = $13

Dividend growth rate(g) = 4%

So, cost of equity = (0.6864/13) + 0.04 = 9.28% .......................................................(I)

Cost of equity using CAPM model = Rf + Beta*(Rm - Rf)

where,

Market return(Rm) = 10.64%

Market risk premium(Rm - Rf) = 7.52%

Risk free rate(Rf) = 10.64% - 7.52% = 3.12%

Beta = 1.16

So, cost of equity = 0.0312 + 1.16*0.0752 = 11.84% ....................................................(II)

Now, an average of (I) and (II) is (0.0928 + 0.1184)/2 = 10.56%

Option (B) IS CORRECT

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Answer 5:

Option C: I and III only is CORRECT

Explanation: Overall cost of capital when used as a discount rate can lead to inaccurate rejection of small, low risk project and acceptance of large, high risk projects. This is because the overall cost of project calculation assumes that the risk profile of the project remains the same as before or as per its industry. Hence, any new project which is small in size has to factor in high risk even though its risks are considerably lesser. Second, there is no scope for revision in the capital structure for cost of capital calculation. So, even for a new project, the existing capital structure is factored in for calculation.