Question 6 Suppose Tommy Tan, president of Tommy Garments Ltd, has hired you to determine the firm's cost of debt and cost of equity capital. (i) The stock currently sells for $50 per share, and the dividend per share will probably be about $5. Tommy argues, "It will cost us $5 per share to use the stockholders' money this year, so, the cost of equity is equal to 10 percent ($5/50)." Comment on this statement. (ii) Based on the most recent financial statements, Tommy Garments Lid total liabilities are $8 million. Total interest expense for the coming year will be about $1 million. Tommy therefore reasons "We owe $8 million, and we will pay $1 million interest. Therefore, our cost of debt is obviously $1 million/8 million = 12.5 percent." Comment on this statement. Question 7 BL Plastics's target debt-to-equity ratio is 0.6, its cost of equity is 11.8 percent, and its beta is 1.2. The after-tax cost of debt is 6.4 percent, the tax rate is 34 percent, and the risk-free rate is 3.2 percent. What discount rate should be assigned to a new project the firm is considering if the project's beta is estimated at 0.87, assuming the new project is financed by using the same target debt-to-equity ratio?

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