Question 1

Tom's Ventures has a zero coupon bond issue outstanding that matures in thirteen years. The bonds are selling at 48 percent of par value. The company's tax rate is 34 percent. What is the
Company's after-tax cost of debt?

Accepted Answer

The after-tax cost of debt is the yield to maturity on the bond multiplied by (1 - the tax rate). In this case, the yield to maturity is 48% / 13 = 3.69%. The after-tax cost of debt is therefore 3.69% * (1 - 0.34) = 3.83%.

Question 2

Daniel's Enterprises has a beta of 1.98 and a growth rate of 12 percent. The stock is currently selling for $12 a share. The overall stock market has an 11 percent rate of return and a risk premium of 8
Percent. What is the expected rate of return on Daniel's Enterprises stock?

Accepted Answer

Using the Capital Asset Pricing Model (CAPM), the expected rate of return on the stock is calculated as follows:

Expected rate of return = Risk-free rate + Beta * (Market risk premium)
Market risk premium = Market rate of return - Risk-free rate
Market rate of return = 11%
Risk-free rate = 0%
Market risk premium = 11% - 0% = 11%
Beta = 1.98
Growth rate = 12%

Expected rate of return = 0% + 1.98 * (11%) = 21.78%
However, we need to adjust for the growth rate using the Gordon Growth Model:
Expected rate of return = (Expected dividend yield + Expected growth rate) / Current stock price + growth rate
Expected dividend yield = 0 (not given in the problem)
Expected growth rate = 12%
Current stock price = $12

Expected rate of return = (0 + 12%) / $12 + 12% = 18.84%
Therefore, the expected rate of return on Daniel's Enterprises stock is 18.84%. The best choice is D.

Question 3

Neal Enterprises common stock is currently priced at $36.80 a share. The company is expected to pay $1.20 per share next month as their annual dividend. The dividends have been increasing by 2
Percent annually and are expected to continue doing so. What is the cost of equity for Neal
Enterprises?

Accepted Answer

The answer of Neal Enterprises common stock is currently priced...

Question 4

Jabila Corporation is an all equity company with common and preferred shares. There are 600,000 common shares outstanding. Currently the common shares have a price of $15 per share and have
Consistently provided a $3 per share dividend. There are 75,000 8% preferred shares outstanding,
With a stock price of $100 per share. Given this information, calculated the company's WACC.

Accepted Answer

The answer of Jabila Corporation is an all equity company...

Question 5

Backyard Tavern has a beta of 1.5 and a cost of equity of 13.2 percent. The risk-free rate of return is 4.2 percent. Backyard is considering a project with a beta of 1.7 and a project life of eight years. An
Appropriate discount rate for the project is:

Accepted Answer

The appropriate discount rate (cost of equity) for the new project can be calculated using the Capital Asset Pricing Model (CAPM):
Cost of equity = Risk-free rate + Beta * (Market risk premium)
Market risk premium can be assumed to be around 5-6%.
Using the given information,
Cost of equity for Backyard Tavern = 13.2%
Beta of Backyard Tavern = 1.5
Risk-free rate = 4.2%
Market risk premium = 5.4% (assuming an average market risk premium of 5-6%)
Using CAPM,
13.2% = 4.2% + 1.5 * (5.4%)
Solving for Beta of the new project,
Beta of new project = (Beta of Backyard * project life) / (Beta of Backyard * project life + 1) = (1.5 * 8) / (1.5 * 8 + 1.7) = 1.238
Using CAPM,
Cost of equity for new project = 4.2% + 1.238 * 5.4% = 11.96%
Adjusting for project risk and uncertainty, the appropriate discount rate would be slightly higher than the cost of equity for the new project. Therefore, the best choice is C) 14.40%.

Question 6

Roberts Co.'s zero coupon bonds mature in 22 years and have a yield to maturity of 12.01%. Each zero has a face value of $1,000 and there are 2,000 of the bonds outstanding. If the market value of
Roberts' equity is $1,000,000, what capital structure weight for debt would you use in calculating
The WACC, assuming Roberts' only debt consists of the zeros?

Accepted Answer

The answer of Roberts Co.'s zero coupon bonds mature in...

Question 7

Stock in Nantec Corporation has a beta of 1.4. The market risk premium is 8%, and T-bills are currently yielding 5.5%. The company's most recent dividend was $2 per share, and dividends are
Expected to grow at a 5% annual rate indeﬁnitely. If the stock sells for $42 per share, what is your
Best estimate of the company's cost of equity?

Accepted Answer

The correct answer is A because the cost of equity is calculated as the risk-free rate plus the beta of the stock multiplied by the market risk premium. In this case, the risk-free rate is 5.5%, the beta of the stock is 1.4, and the market risk premium is 8%. Therefore, the cost of equity is 5.5% + 1.4 * 8% = 13.35%.

Question 8

A ﬁrm has a debt-equity ratio of .25. What weight should be given to the equity for the WACC computation?

Accepted Answer

The answer of A ﬁrm has a debt-equity ratio of...

Question 9

Buy It Cheap has an overall beta of .88 and a cost of equity of 11.2 percent for the ﬁrm overall. The ﬁrm is 100 percent ﬁnanced with common stock. Division A within the ﬁrm has an estimated beta of
1)34 and is the riskiest of all of the ﬁrm's operations. What is an appropriate cost of capital for
Division A if the market risk premium is 5 percent?

Accepted Answer

The correct answer is A because the cost of capital for Division A can be calculated using the following formula: Cost of capital = Risk-free rate + Beta * Market risk premium. The risk-free rate is assumed to be 5 percent, the beta for Division A is given as 1.34, and the market risk premium is given as 5 percent. Plugging these values into the formula, we get: Cost of capital = 5% + 1.34 * 5% = 13.5%.

Question 10

The outstanding bonds of Frank's Recycled Goods are priced at $987 and mature in 11 years. These bonds have a 6.5 percent coupon and pay interest annually. The ﬁrm's tax rate is 34 percent. What
Is Frank's after-tax cost of debt?

Accepted Answer

The answer of The outstanding bonds of Frank's Recycled Goods...

Question 11

Given the following information, what is the average annual dividend growth rate?

Accepted Answer

Using the dividend growth rate formula (annual dividend per share at end of period – annual dividend per share at beginning of period) / annual dividend per share at beginning of period, we get:

(0.096-0.084)/0.084 = 0.1429 = 14.29%

Therefore, the average annual dividend growth rate is 14.29%/3 = 4.762%, which is closest to answer choice C) 4.1%.

Question 12

A company has a stock price of $50.00 and paid a dividend of $1.48 per share last year. The estimated growth rate is 2%. What is the cost of equity based on the dividend growth model?

Accepted Answer

The answer of A company has a stock price of...

Question 13

Highpark Industrial has a $500,000 bond issue outstanding that is selling at 96 percent of face value. Highpark also has 6,500 shares of preferred stock and 22,000 shares of common stock
Outstanding. The preferred stock has a market price of $50 a share compared to a price of $35 a
Share for the common stock. What is the weight of the preferred stock as it relates to the ﬁrm's
Weighted average cost of capital?

Accepted Answer

The answer of Highpark Industrial has a $500,000 bond issue...

Question 14

Topstone Industries' preferred stock pays an annual dividend of $4 per share. When issued, the shares sold for their par value of $100 per share. What is the cost of preferred stock if the current
Price is $125 per share?

Accepted Answer

The cost of preferred stock is calculated as the annual dividend divided by the current price. So, $4 / $125 = 0.032 or 3.2%.

Question 15

Production Unlimited has an overall beta of .92 and a cost of equity of 10.8 percent for the ﬁrm overall. The ﬁrm is 100 percent ﬁnanced with common stock. Division A within the ﬁrm has an
Estimated beta of 1.47 and is the riskiest of all of the ﬁrm's operations. What is an appropriate cost
Of capital for division A if the market risk premium is 6 percent?

Accepted Answer

Using the Capital Asset Pricing Model (CAPM) formula:
Cost of Equity = Risk-Free Rate + Beta * (Market Risk Premium)
We can solve for the cost of equity for Division A:
10.8% = 0 + 0.92 * 6%
1.47 = 14.1%
Therefore, an appropriate cost of capital for Division A would be 14.1 percent.

Question 16

McQuinty, Inc. has a beta of 1.34 and a marginal tax rate of 31%. The company has one bond issue outstanding with a total face value of $750,000. The bonds are currently quoted at 98.6. These
Bonds have seven years to maturity, a 6% coupon rate, and pay interest semi-annually. What is the
After-tax cost of debt for McQuinty, Inc.?

Accepted Answer

First, we need to calculate the current market price of the bond:
Coupon payment = 750,000 x 6% = $45,000 per year (paid semi-annually)
Semi-annual coupon payment = $45,000 / 2 = $22,500
Number of coupon payments = 7 x 2 = 14
PVIFA(7 years, 3% semi-annual rate) = 6.3317
PV of the bond = $22,500 x 6.3317 + $750,000 x 0.986 = $790,548.45

Next, we can calculate the before-tax cost of debt:
Coupon payment / Face value of bond = 6% 
After-tax cost of debt = before-tax cost of debt x (1 - Marginal tax rate)
We can estimate the before-tax cost of debt using the following formula:
r = risk-free rate + beta x market risk premium
Assuming a risk-free rate of 2.5% and a market risk premium of 6%, we get:
r = 2.5% + 1.34 x 6% = 10.04%
Before-tax cost of debt = 6% x (1 - 0.31) = 4.14%
After-tax cost of debt = 4.14% x (1 - 0.31) = 2.85%

Therefore, the after-tax cost of debt for McQuinty, Inc. is 2.85%. However, this answer is not one of the answer choices provided. The closest answer is B, 4.31%, which is the before-tax cost of debt calculated above.

Question 17

Watson's Automotive has a $400,000 bond issue outstanding that is selling at 102 percent of face value. Watson's also has 4,500 shares of preferred stock and 21,000 shares of common stock
Outstanding. The preferred stock has a market price of $44 a share compared to a price of $21 a
Share for the common stock. What is the weight of the debt as it relates to the ﬁrm's weighted
Average cost of capital?

Accepted Answer

The weight of the debt is calculated by dividing the market value of the debt by the total market value of the firm's financing. The bond's market value is $400,000 * 1.02 = $408,000. The preferred stock's market value is 4,500 * $44 = $198,000. The common stock's market value is 21,000 * $21 = $441,000. The total market value is $408,000 + $198,000 + $441,000 = $1,047,000. The weight of the debt is $408,000 / $1,047,000 = 0.389, or 39 percent.

Question 18

Don's Travel Trailers has a beta of 1.34 and a growth rate of 4.5 percent. The ﬁrm's stock is currently selling for $46.20 a share. The overall stock market has a 12.5 percent rate of return and a risk
Premium of 8.2 percent. What is the expected rate of return on this stock?

Accepted Answer

The answer of Don's Travel Trailers has a beta of...

Question 19

Mistletoe Unlimited has 1,100 bonds outstanding that are selling for $992 each. The company also has 9,500 shares of preferred stock at a market price of $46 each. The common stock is priced at
$29 a share and there are 34,500 shares outstanding. What is the weight of the preferred stock as
It relates to the ﬁrm's weighted average cost of capital?

Accepted Answer

The weight of preferred stock can be calculated using the formula:

Weight of preferred stock = (Market value of preferred stock / Total market value of firm) x 100

Market value of preferred stock = 9,500 x $46 = $437,000
Market value of bonds = 1,100 x $992 = $1,091,200
Market value of common stock = 34,500 x $29 = $1,000,500

Total market value of the firm = $437,000 + $1,091,200 + $1,000,500 = $2,528,700

Therefore, the weight of preferred stock = ($437,000 / $2,528,700) x 100 = 17.27%

Rounding to the nearest whole number, the answer is B: 17 percent.

Question 20

Katie's Boutique has zero-coupon bonds outstanding that mature in four years. The bonds have a face value of $1,000 and a current market price of $820. What is the company's pre-tax cost of
Debt?

Accepted Answer

The answer of Katie's Boutique has zero-coupon bonds outstanding that...

Quiz 14: Cost of Capital

Tom's Ventures has a zero coupon bond issue outstanding that matures in thirteen years. The bonds are selling at 48 percent of par value. The company's tax rate is 34 percent. What is the Company's after-tax cost of debt?

Daniel's Enterprises has a beta of 1.98 and a growth rate of 12 percent. The stock is currently selling for $12 a share. The overall stock market has an 11 percent rate of return and a risk premium of 8 Percent. What is the expected rate of return on Daniel's Enterprises stock?

Neal Enterprises common stock is currently priced at $36.80 a share. The company is expected to pay $1.20 per share next month as their annual dividend. The dividends have been increasing by 2 Percent annually and are expected to continue doing so. What is the cost of equity for Neal Enterprises?

Backyard Tavern has a beta of 1.5 and a cost of equity of 13.2 percent. The risk-free rate of return is 4.2 percent. Backyard is considering a project with a beta of 1.7 and a project life of eight years. An Appropriate discount rate for the project is:

A ﬁrm has a debt-equity ratio of .25. What weight should be given to the equity for the WACC computation?

The outstanding bonds of Frank's Recycled Goods are priced at $987 and mature in 11 years. These bonds have a 6.5 percent coupon and pay interest annually. The ﬁrm's tax rate is 34 percent. What Is Frank's after-tax cost of debt?

Given the following information, what is the average annual dividend growth rate?

A company has a stock price of $50.00 and paid a dividend of $1.48 per share last year. The estimated growth rate is 2%. What is the cost of equity based on the dividend growth model?

Topstone Industries' preferred stock pays an annual dividend of $4 per share. When issued, the shares sold for their par value of $100 per share. What is the cost of preferred stock if the current Price is $125 per share?

Don's Travel Trailers has a beta of 1.34 and a growth rate of 4.5 percent. The ﬁrm's stock is currently selling for $46.20 a share. The overall stock market has a 12.5 percent rate of return and a risk Premium of 8.2 percent. What is the expected rate of return on this stock?

Katie's Boutique has zero-coupon bonds outstanding that mature in four years. The bonds have a face value of $1,000 and a current market price of $820. What is the company's pre-tax cost of Debt?