FINA CH14 HOMEWORK

Alpha Industries is considering a project with an initial cost of $9.4 million. The project will produce cash inflows of $2.14 million per year for 6 years. The project has the same risk as the firm. The firm has a pretax cost of debt of 6.03 percent and a cost of equity of 11.55 percent. The debt-equity ratio is .74 and the tax rate is 21 percent. What is the net present value of the project?

$296,838

Further From Center has 11,300 shares of common stock outstanding at a price of $47 per share. It also has 270 shares of preferred stock outstanding at a price of $89 per share. There are 290 bonds outstanding that have a coupon rate of 6.6 percent paid semiannually. The bonds mature in 28 years, have a face value of $2,000, and sell at 107.5 percent of par. What is the capital structure weight of the preferred stock?

.0204

Countess Corporation is expected to pay an annual dividend of $4.69 on its common stock in one year. The current stock price is $74.63 per share. The company announced that it will increase its dividend by 3.80 percent annually. What is the company's cost of equity?

10.08%

What is the cost of equity for the TMB Corporation based on the following information? Risk premium = 5% Risk free rate = 4% TMB beta: 1.50

11.50%

Piedmont Hotels is an all-equity company. Its stock has a beta of 1.17. The market risk premium is 6.6 percent and the risk-free rate is 2.4 percent. The company is considering a project that it considers riskier than its current operations so it wants to apply an adjustment of 1.6 percent to the project's discount rate. What should the firm set as the required rate of return for the project?

11.72%

Smathers Corporation stock has a beta of 1.12. The market risk premium is 7.90 percent and the risk-free rate is 3.27 percent annually. What is the company's cost of equity?

12.12%

If ABC corporation paid a dividend of $6 per share last year. The stock currently sells for $80 per share. You estimate that the dividend will grow steadily at a rate of 6% per year into the indefinite future. What is the cost of equity?

13.95%

Starbucks wants to use the subjective approach to evaluate a new project. They are considering expanding their stores and renting office space to small business owners. They will have a separate reception area and online scheduling for those that want to use the office space. Starbucks has a WACC of 12%. What would be the WACC for this new project? Category Examples Adjustment Factor High risk New products. 6% Moderate risk. Cost savings, expansion of existing equipment 0 Low risk. Replacement of existing equipment (4) Mandatory Safety equipment n/a

18%

The outstanding bonds of Harden Fitness are priced at $1,014.66 and mature in 5 years. These bonds have a face value of $1,000, a coupon rate of 4.5 percent, and pay interest semiannually. The tax rate is 21 percent. What is the aftertax cost of debt?

3.29%

Bethesda Water has an issue of preferred stock outstanding with a coupon rate of 4.20 percent that sells for $90.86 per share. If the par value is $100, what is the cost of the company's preferred stock?

4.62%

Galvatron Metals has a bond outstanding with a coupon rate of 6.6 percent and semiannual payments. The bond currently sells for $1,898 and matures in 16 years. The par value is $2,000 and the company's tax rate is 21 percent. What is the company's aftertax cost of debt?

5.64%

DEF Corporation had two issues of ordinary preferred stock with a $100 par value traded on the NYSE. One issue paid $5.56 annually per share and sold for $95.55 per share. The other paid $5.88 per share annually and sold for $97.50 per share. What is DEF's Corporation's cost of preferred stock?

5.93%

Suppose a corporation issued a 20-year annual, 7 percent bond, 10 years ago. The bond is currently selling for 92 percent of its face value, or $920. What is the corporation's cost of debt?

8.20%

Suppose a corporation issued a 30-year annual, 8 percent bond, 10 years ago. The bond is currently selling for 95 percent of its face value, or $950. What is the corporation's cost of debt?

8.53%

The Two Dollar Store has a cost of equity of 11.9 percent, the YTM on the company's bonds is 6.2 percent, and the tax rate is 21 percent. If the company's debt-equity ratio is .54, what is the weighted average cost of capital?

9.44%

Upton Umbrellas has a cost of equity of 10.9 percent, the YTM on the company's bonds is 5.6 percent, and the tax rate is 21 percent. The company's bonds sell for 94.1 percent of par. The debt has a book value of $390,000 and total assets have a book value of $946,000. If the market-to-book ratio is 2.56 times, what is the company's WACC?

9.57%

Assume a firm utilizes the security market line approach to determine the cost of equity. If the firm currently pays an annual dividend of $2.40 per share and has a beta of 1.42, all else constant, which of the following actions will decrease the firm's cost of equity?

A decrease in the firm's beta

The cost of capital depends primarily on the source of the funds, not the use.

False

The coupon rate on the firm's outstanding debt can be used as a substitute for the cost of debt.

False

Which of the following statements regarding the weighted average cost of capital is accurate?

It is the return investors require on the total assets of the firm.

With respect to capital project analysis, which of the following statements is accurate?

Overall, a company makes better decisions when it uses the subjective approach than when it uses its WACC as the discount rate for all projects.

For the Dividend Growth Model, the equation can be written as follows: P0 = =D1/(RE - g). How can this equation be rearranged?

RE = D1/P0 + g

Which of the following is the main advantage of using the dividend growth model to estimate a firm's cost of equity?

The simplicity of the model.

Since preferred stock has a fixed dividend paid every period forever, it is essentially a perpetuity.

True

What is the subjective approach?

Using a WACC that involves making subjective adjustments based upon the project.

What is the pure play approach?

Using a WACC that is based on companies in similar lines of business.

A firm's target capital structure represents:

a fixed debt-equity ratio that the company attempts to maintain.

Velasquez Manufacturing has two vastly different lines of business: Alpha and Omega. The Alpha line is the riskiest of the two, and accounts for 72 percent of the firm's sales. When deciding which project proposals should be accepted, the managers should:

assign appropriate, but differing, discount rates to each business line and then select the projects with the highest net present values.

Okonjo Economics has a debt-equity ratio of .38. All of the firm's outstanding shares were purchased by a small number of investors. The return these investors require is called the:

cost of equity.

The required return of preferred stock is equal to the ________ ________ on the preferred stock.

dividend yield

The percent of investment that the project costs can be referred to as all of the following, except:

free cash flow

The cost of preferred stock is equivalent to the:

rate of return on a perpetuity.

For any given capital project proposal, the discount rate should be based on the:

risks associated with the use of the funds required by the project.