Question 1

Dexter United has a debt-equity ratio of.70 and a tax rate of 34 %. The firm does not issue preferred stock. The cost of equity is 15 % and the pre-tax cost of debt is 8.5 %. What is Dexter's weighted average cost of capital?

Accepted Answer

The answer of Dexter United has a debt-equity ratio of.70...

Question 2

JLP Industries has 6.5 million shares of common stock outstanding with a market price of $14 per share. The company also has outstanding preferred stock with a market value of $10 million, and 25,000 bonds outstanding, each with face value $1,000 and selling at 90% of par value. The cost of equity is 14%, the cost of preferred is 10%, and the cost of debt is 7.25%. If JLP's tax rate is 34%, what is the WACC?

Accepted Answer

The answer of JLP Industries has 6.5 million shares of...

Question 3

Winslow and Moore has paid annual dividends of $1.00, $1.03, $1.05, $1.05, and $1.08 over the past five years respectively. What is the average dividend growth rate?

Accepted Answer

The answer of Winslow and Moore has paid annual dividends...

Question 4

Teri's Tires has 7 % preferred stock outstanding that sells for $68 a share. What is Teri's cost of preferred stock?

Accepted Answer

The answer of Teri's Tires has 7 % preferred stock...

Question 5

Given the following information, what is the value of XYZ Corporation?

Common Stock: 14. 2 million shares outstanding, price = $35 per share
Bond Issue 1: $500 million total face value, price = 102% of face value
Bond Issue 2: $175 million total face value, price = $850 per bond

Accepted Answer

The value of XYZ Corporation can be calculated by adding the value of its common stock and the value of its bond issues. - The value of the common stock is calculated as 14.2 million shares * $35 per share = $497 million.- The value of Bond Issue 1 is 102% of its face value, which is $500 million * 102% = $510 million.- The value of Bond Issue 2 is given per bond, so we need to calculate the number of bonds first. Since the total face value is $175 million and it's common for bonds to have a face value of $1,000 (implied by the price being $850 "per bond"), there are 175,000 bonds ($175 million / $1,000). The value of Bond Issue 2 is 175,000 bonds * $850 = $148.75 million.Adding these values together gives the total value of XYZ Corporation as $497 million + $510 million + $148.75 million = $1,155.75 million.

Question 6

Angelo's Office Supply just paid an annual dividend of $2.40 a share. The market price of the stock is $31.80 and the growth rate is 2.5 %. What is the firm's cost of equity?

Accepted Answer

The answer of Angelo's Office Supply just paid an annual...

Question 7

Styles Corporation has a current stock price of $24 and has consistently provided a $3 dividend. If the expected stock market return is 15% and the risk free rate is 4%, determine the company's Beta.

Accepted Answer

The correct answer is A because Beta can be calculated using the formula: Beta = (Expected Stock Return - Risk-Free Rate) / (Market Risk Premium). In this case, the expected stock return is $3 / $24 + 4% = 19%, the risk-free rate is 4%, and the market risk premium is 15% - 4% = 11%. Therefore, Beta = (19% - 4%) / 11% = .77.

Question 8

Suppose a firm has 10.4 million shares of common stock outstanding with a par value of $1 per share. The current market price per share is $12. The firm has outstanding debt with a par value of $56 million selling at 102% of par. What capital structure weight would you use for debt when calculating the firm's WACC?

Accepted Answer

The weight of debt in the firm's capital structure is calculated by dividing the market value of the debt by the total market value of the firm's financing (equity + debt). The market value of the debt is $56 million * 102% = $57.12 million. The market value of equity is 10.4 million shares * $12 = $124.8 million. Therefore, the total market value of financing is $57.12 million + $124.8 million = $181.92 million. The weight of debt is $57.12 million / $181.92 million = 0.314.

Question 9

Discount Retailers has an overall beta of.96 and a cost of equity of 10.4 % for the firm overall. The firm is financed solely by common stock. Division A within the firm has an estimated beta of 1.13 and is the riskiest of all of the firm's divisions What is an appropriate cost of capital for division A if the market risk premium is 5 %?

Accepted Answer

The answer of Discount Retailers has an overall beta of.96...

Question 10

Alba Corporation has a current stock price of $18 and has consistently provided a $2 dividend. If the expected stock market return is 12% and the risk free rate is 5%, determine the company's Beta.

Accepted Answer

The answer of Alba Corporation has a current stock price...

Question 11

Sam's Souvenir Shop has a cost of debt of 8 %, a cost of equity of 12 %, and a cost of preferred stock of 9 %. The firm has 116,000 shares of common stock outstanding at a market price of $24 a share. There are 51,000 shares of preferred stock outstanding at a market price of $38 a share. The bond issue has a face value of $900,000 and a market quote of 105. The company's tax rate is 35 %. What is the weighted average cost of capital for Sam's Souvenir Shop?

Accepted Answer

To calculate the weighted average cost of capital (WACC), we need to find the weights of debt, preferred stock, and equity in the capital structure and then apply the respective costs to these weights.1. Market value of equity (E) = Number of shares * Price per share = 116,000 * $24 = $2,784,0002. Market value of preferred stock (P) = Number of shares * Price per share = 51,000 * $38 = $1,938,0003. Market value of debt (D) = Bond issue face value * Market quote / 100 = $900,000 * 105 / 100 = $945,000Total value of the firm (V) = E + P + D = $2,784,000 + $1,938,000 + $945,000 = $5,667,000Weights:- Weight of equity (W_e) = E / V = $2,784,000 / $5,667,000 = 0.491- Weight of preferred stock (W_p) = P / V = $1,938,000 / $5,667,000 = 0.342- Weight of debt (W_d) = D / V = $945,000 / $5,667,000 = 0.167Costs:- Cost of equity (R_e) = 12%- Cost of preferred stock (R_p) = 9%- Cost of debt (R_d) = 8%- After-tax cost of debt = R_d * (1 - Tax rate) = 8% * (1 - 0.35) = 5.2%WACC = (W_e * R_e) + (W_p * R_p) + (W_d * After-tax R_d)WACC = (0.491 * 12%) + (0.342 * 9%) + (0.167 * 5.2%) = 5.892% + 3.078% + 0.8684% = 9.8384%Rounded to two decimal places, the WACC is approximately 9.84%.

Question 12

Martha's Interiors has a beta of 1.2. The market risk premium is 6 % and the risk-free rate of return is 4 %. By how much will the cost of equity increase if the company completes an acquisition such that their company beta rises to 1.4?

Accepted Answer

The answer of Martha's Interiors has a beta of 1.2....

Question 13

Which of the following correctly describes the computation of the firm's weighted average cost of capital (WACC)?

Accepted Answer

The correct formula for WACC is a weighted sum of the costs of equity and debt, taking into account the tax shield on debt. The formula is represented as (E/V) * Re + (D/V) * Rd * (1-Tc), where E is the market value of the equity, V is the total market value of the firm (E + D), Re is the cost of equity, D is the market value of the debt, Rd is the cost of debt, and Tc is the corporate tax rate. Option E correctly represents this formula, albeit with placeholder symbols for the variables.

Question 14

Wild Ducks Unlimited wants to have a weighted average cost of capital of 8.5 %. The firm has an after-tax cost of debt of 4.6 % and a cost of equity of 12 %. What debt-equity ratio is needed for the firm to achieve the targeted weighted average cost of capital?

Accepted Answer

The answer of Wild Ducks Unlimited wants to have a...

Question 15

Topstone Industries is expected to pay a dividend of $2.10 per share in one year. This dividend, along with the firm's earnings, is expected to grow at a rate of 5% forever. If the current market price for a share of Topstone is $38.62, what is the cost of equity?

Accepted Answer

The cost of equity can be calculated using the Gordon Growth Model (Dividend Discount Model for a perpetuity) formula: Cost of Equity = (Dividend per Share / Current Market Price) + Growth Rate. Plugging in the values: (2.10 / 38.62) + 0.05 = 0.0544 + 0.05 = 0.1044 or 10.44%.

Question 16

The Sugar Cookie Company just paid its annual dividend of $.45 a share. The stock has a market price of $21 and a beta of.88. The return on Treasury bills is 4.2 % and the market has an 11.8 % rate of return. What is the cost of equity for the Cookie Company?

Accepted Answer

The cost of equity can be calculated using the Capital Asset Pricing Model (CAPM), which is given by the formula: Cost of Equity = Risk-Free Rate + Beta * (Market Rate of Return - Risk-Free Rate). Plugging in the given values: Cost of Equity = 4.2% + 0.88 * (11.8% - 4.2%) = 4.2% + 0.88 * 7.6% = 4.2% + 6.688% = 10.888%. Rounding this to two decimal places gives us 10.89%.

Question 17

Blue Ribbon, Inc. wants to have a weighted average cost of capital of 10 %. The firm has an after-tax cost of debt of 4 % and a cost of equity of 12 %. What debt-equity ratio is needed for the firm to achieve their targeted weighted average cost of capital?

Accepted Answer

The weighted average cost of capital (WACC) is calculated as follows: WACC = E/V * Re + D/V * Rd * (1 - Tc), where E is the market value of the equity, D is the market value of the debt, V = E + D is the total market value of the firm's financing (equity and debt), Re is the cost of equity, Rd is the cost of debt, and Tc is the corporate tax rate. However, since the after-tax cost of debt is already given, we don't need to adjust Rd for taxes in this calculation.Given that the firm wants a WACC of 10%, the after-tax cost of debt (Rd) is 4%, and the cost of equity (Re) is 12%, we can set up the equation to solve for the debt-equity ratio (D/E), which is D/V divided by E/V.Let's denote the debt-equity ratio as x. Therefore, D/E = x, which implies D/V = x / (1 + x) and E/V = 1 / (1 + x).The equation to achieve a WACC of 10% is:10% = (1 / (1 + x)) * 12% + (x / (1 + x)) * 4%Solving for x gives us a debt-equity ratio of 0.333..., which is approximately 0.33 or 33%.

Question 18

Kottinger's Kamp Supplies is considering an investment in new manufacturing equipment. The equipment costs $220,000 and will provide annual after-tax inflows of $50,000 at the end of each of the next seven years. The firm's market value debt/equity ratio is 25%, its cost of equity is 14%, and its pre-tax cost of debt is 7%. The flotation costs of debt and equity are 3% and 9%, respectively. The firm's combined marginal federal and provincial tax rate is 40%. Assume the project is of approximately the same risk as the firm's existing operations.

What is Kottinger's weighted average cost of capital?

Accepted Answer

The answer of Kottinger's Kamp Supplies is considering an investment...

Question 19

Rosie's Grill has a beta of 1.2, a stock price of $26 and an expected annual dividend of $1.30 a share, which is to be paid next month. The dividend growth rate is 4 %. The market has a 10 % rate of return and a risk premium of 6 %. What is the average expected cost of equity for Rosie's Grill?

Accepted Answer

The answer of Rosie's Grill has a beta of 1.2,...

Question 20

Anthony's Antiques, Inc. has preferred stock outstanding which pays a dividend of $4 per share a year. The current stock price is $32 per share. What is the cost of preferred stock?

Accepted Answer

The answer of Anthony's Antiques, Inc. has preferred stock outstanding...

Quiz 14: Cost of Capital