Business Finance - Chapter 12 Open Book Quiz

Alpha Industries is considering a project with an initial cost of $8.2 million. The project will produce cash inflows of $1.93 million per year for 6 years. The project has the same risk as the firm. The firm has a pretax cost of debt of 5.67% and a cost of equity of 11.31%. The debt-equity ratio is .62 and the tax rate is 24%. What is the net present value of the project?

$553,990 WACC = (1 / 1.62) (0.1131) + (0.62 / 1.62) (0.0567) (1 - 0.24) = 0.0863068 -> CF CF0 = -$8,200,000 C01 = $1,930,000 F01 = 6 -> NPV I = 8.63068 CPT NPV = $553,990

Alpha Industries is considering a project with an initial cost of $7.9 million. The project will produce cash inflows of $1.87 million per year for 6 years. The project has the same risk as the firm. The firm has a pretax cost of debt of 5.43% and a cost of equity of 11.15%. The debt-equity ratio is .65 and the tax rate is 21%. What is the net present value of the project?

$628,680 WACC = (1 / 1.65) (0.1115) + (0.65 / 1.65) (.0543) (1 - 0.21) = 0.0844745758 -> CF CF0 = -$7,900,000 C01 = $1,870,000 F01 = 6 -> NPV I = 8.44746 CPT NPV = $628,680

Alpha Industries is considering a project with an initial cost of $9.3 million. The project will produce cash inflows of $1.64 million per year for 9 years. The project has the same risk as the firm. The firm has a pretax cost of debt of 6.00% and a cost of equity of 11.53%. The debt-equity ratio is .73 and the tax rate is 25%. What is the net present value of the project?

$709,081 WACC = (1 / 1.73) (0.1153) + (0.73 / 1.73) (.06) (1 - 0.25) = 0.0856358381 -> CF CF0 = -$9,300,000 C01 = $1,640,000 F01 = 9 -> NPV I = 8.56358 CPT NPV = $709,081

Further From Center has 10,600 shares of common stock outstanding at a price of $40 per share. It also has 235 shares of preferred stock outstanding at a price of $91 per share. There are 560 bonds outstanding that have a coupon rate of 5.9% paid semiannually. The bonds mature in 21 years, have a face value of $1,000, and sell at 95% of par. What is the capital structure weight of the preferred stock?

.0219 common stock = 10,600 x $40 = $424,000 preferred stock = 235 x $91 = $21,385 debt = ($1,000 x .95) x 560 = $532,000 total value of the firm = $977,385 capital structure weight of preferred stock = $21,385 / $977,385 = .0219

Saint Nick Enterprises has 19,100 shares of common stock outstanding at a price of $77 per share. The company has two bond issues outstanding. The first issue has 7 years to maturity, a par value of $2,000 per bond, and sells for 95.5% of par. The second issue matures in 21 years, has a par value of $1,000 per bond, and sells for 96.5% of par. The total face value of the first issue is $330,000, while the total face value of the second issue is $430,000. What is the capital structure weight of debt?

.3317 total equity: common stock = 19,100 x $77 = $1,470,700 total debt: bond 1 = $330,000x 0.955 = $315,150 bond 2 = $430,000x 0.965 = $414,950 total debt = $730,100 total value of firm = $2,200,800 weight of debt = $730,100 / $2,200,800 = .3317

Saint Nick Enterprises has 17,300 shares of common stock outstanding at a price of $68 per share. The company has two bond issues outstanding. The first issue has 6 years to maturity, a par value of $1,000 per bond, and sells for 101% of par. The second issue matures in 20 years, has a par value of $2,000 per bond, and sells for 106% of par. The total face value of the first issue is $240,000, while the total face value of the second issue is $340,000. What is the capital structure weight of debt?

.3388 total equity: common stock = 17,300 x $68 = $1,176,400 total debt: bond 1 = $240000 x 1.01 = $242,400 bond 2 = $340,000 x 1.06 = $360,400 total debt = $602,800 total value of firm = $1,779,200 weight of debt = $602,800 / $1,779,200 = .3388

Saint Nick Enterprises has 18,100 shares of common stock outstanding at a price of $72 per share. The company has two bond issues outstanding. The first issue has 10 years to maturity, a par value of $2,000 per bond, and sells for 103% of par. The second issue matures in 24 years, has a par value of $1,000 per bond, and sells for 108% of par. The total face value of the first issue is $280,000, while the total face value of the second issue is $380,000. What is the capital structure weight of debt?

.3491 total equity: common stock = 18,100 x $72 = $1,303,200 total debt: bond 1 = $280,000 x 1.03 = $288,400 bond 2 = $380,000 x 1.08 = $410,400 total debt = $698,800 total value of firm = $2,002,000 weight of debt = $698,800 / $2,002,000 = .3491

Kim's Bridal Shoppe has 10,700 shares of common stock outstanding at a price of $41 per share. It also has 240 shares of preferred stock outstanding at a price of $92 per share. There are 570 bonds outstanding that have a coupon rate of 6% paid semiannually. The bonds mature in 22 years, have a face value of $1,000, and sell at 104.5% of par. What is the capital structure weight of the common stock?

.4153 common stock = 10,700 x $41 = $438,700 preferred stock = 240 x $92 = $22,080 debt = 570 x ($1,000 x 1.045) = $595,650 total value of firm = $1,056,430 weight of common stock = $438,700 / $1,056,430 = 0.4153

Kim's Bridal Shoppe 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% paid semiannually. The bonds mature in 28 years, have a face value of $2,000, and sell at 107.5% of par. What is the capital structure weight of the common stock?

.4506 common stock = 11,300 x $47 = $531,100 preferred stock = 270 x $89 = $24,030 debt = 290 x ($2,000 x 1.075) = $623,500 total value of firm = $1,178,630 weight of common stock = $531,100 / $1,178,630 = 0.4506

Here I Sit Sofas has 5,700 shares of common stock outstanding at a price of $80 per share. There are 590 bonds that mature in 16 years with a coupon rate of 5.4% paid semiannually. The bonds have a par value of $1,000 each and sell at 92.5% of par. The company also has 4,600 shares of preferred stock outstanding at a price of $33 per share. What is the capital structure weight of debt?

.4731 common stock = 5,700 x $80 = $456,000 debt = ($1,000 x .925) x 590 bonds = $545,750 preferred stock = 4,600 x $33 = $151,800 total value of the firm = $1,153,550 capital structure weight of debt = $545,750 / $1,153,550 = .4731

Here I Sit Sofas has 8,000 shares of common stock outstanding at a price of $103 per share. There are 960 bonds that mature in 39 years with a coupon rate of 7.7% paid semiannually. The bonds have a par value of $2,000 each and sell at 113% of par. The company also has 6,900 shares of preferred stock outstanding at a price of $56 per share. What is the capital structure weight of debt?

.6419 common stock = 8,000 x $103 = $824,000 debt = ($2,000 x 1.13) x 960 bonds = $2,169,600 preferred stock = 6,900 x $56 = $386,400 total value of the firm = $3,380,000 capital structure weight of debt = $2,169,600 / $3,380,000 = 0.6419

Western Electric has 32,500 shares of common stock outstanding at a price per share of $80 and a rate of return of 12.95%. The firm has 7,350 shares of 7.90% preferred stock outstanding at a price of $95.50 per share. The preferred stock has a par value of $100. The outstanding debt has a total face value of $407,000 and currently sells for 111.5% of face. The yield to maturity on the debt is 8.11% . What is the firm's weighted average cost of capital if the tax rate is 25%?

11.25% common stock = 32,500 x $80 = $2,600,000 preferred stock = 7,350 x $95.50 = $701,925 debt = $407,000 x 1.115 = $453,805 total value = $3,755,730 cost of preferred stock = (.079 x $100) / $95.50 = 0.0827225 WACC = ($2,600,000 / $3,755,730) (0.1295) + ($701,925 / $3,755,730) (0.0827225) + ($4653,805 / $3,755,730) (0.0811) (1 - 0.25) = 11.25%

Western Electric has 33,500 shares of common stock outstanding at a price per share of $82 and a rate of return of 12.85%. The firm has 7,450 shares of 8.10% preferred stock outstanding at a price of $96.50 per share. The preferred stock has a par value of $100. The outstanding debt has a total face value of $413,000 and currently sells for 112.5% of face. The yield to maturity on the debt is 8.17% . What is the firm's weighted average cost of capital if the tax rate is 22%?

11.27% common stock = 33,500 x $82 = $2,747,000 preferred stock = 7,450 x $96.50 = $718,925 debt = $413,000 x 0.1125 = $464,625 total value = $3,930,550 cost of preferred stock = (0.810 x $100) / $96.50 = 0.083937 WACC = ($2,747,000 / $3,930,550) (0.1285) + ($718,925 / $3,930,550) (0.083937) + ($464,625 / $3,930,550) (0.0817) (1 - 0.22) = 11.27%

Piedmont Hotels is an all-equity company. Its stock has a beta of 1.27. The market risk premium is 7.1% and the risk-free rate is 2.9%. The company is considering a project that it considers riskier than its current operations so it wants to apply an adjustment of 2.1% to the project's discount rate. What should the firm set as the required rate of return for the project?

14.02% required return = .029 + 1.27 (.071) = .1192 required return adjusted for risk = .1192 + .021 = .1402 = 14.02%

Bethesda Water has an issue of preferred stock outstanding with a coupon rate of 4.10% that sells for $90.54 per share. If the par value is $100, what is the cost of the company's preferred stock?

4.53% cost of preferred stock = (.041 x 100) / $90.54 = 4.53%

Galvatron Metals has a bond outstanding with a coupon rate of 6% and semiannual payments. The bond currently sells for $946 and matures in 22 years. The par value is $1,000 and the company's tax rate is 25%. What is the company's aftertax cost of debt?

4.85% N = 44 PV = - 946 PMT = 30 (1,000 x .06 / 2) FV = 1,000 CPT I/Y = 3.23 x 2 = 6.46% aftertax cost of debt = 6.46 (1 - .25) = 4.85%

Bethesda Water has an issue of preferred stock outstanding with a coupon rate of 5.90% that sells for $96.30 per share. If the par value is $100, what is the cost of the company's preferred stock?

6.13% cost of preferred stock = (.059 x 100) / $96.30 = .0613 = 6.13%

The required return on the stock of Moe's Pizza is 10.8% and the after-tax required return on the company's debt is 3.40%. The company's market value capital structure consists of 69% equity. The company is considering a new project that is less risky than current operations and it feels the risk adjustment factor is minus 1.9%. The tax rate is 25%. What is the required return for the new project?

6.61% WACC = (.69 x .108) + (.31 x .034) = .08506 new required return = .08506 - .019 = .06606 = 6.61%

Too Young, Incorporated, has a bond outstanding with a coupon rate of 6.3% and semiannual payments. The bond currently sells for $944 and matures in 20 years. The par value is $1,000. What is the company's pretax cost of debt?

6.82% N = 40 PV = - 944 PMT = 31.50 (1,000 x .063 / 2) FV = 1,000 CPT I/Y = 3.41 x 2 = 6.82%

Too Young, Incorporated, has a bond outstanding with a coupon rate of 6.9% and semiannual payments. The bond currently sells for $950 and matures in 24 years. The par value is $1,000. What is the company's pretax cost of debt?

7.35% N = 48 (24 x 2) PV = - 950 PMT = 34.50 (1,000 x .069 / 2) FV = 1,000 CPT I/Y = 3.67 x 2 = 7.35%

Take It All Away has a cost of equity of 10.90%, a pretax cost of debt of 5.51%, and a tax rate of 21%. The company's capital structure consists of 74% debt on a book value basis, but debt is 40% of the company's value on a market value basis. What is the company's WACC?

8.28% WACC = (.60 x .1090) + (.40 x .0551) (1 - .21) WACC = .0828 = 8.28%

The required return on the stock of Moe's Pizza is 12.8% and the after-tax required return on the company's debt is 3.98%. The company's market value capital structure consists of 66% equity. The company is considering a new project that is less risky than current operations and it feels the risk adjustment factor is minus 1.5%. The tax rate is 25%. What is the required return for the new project?

8.30% WACC = (.66 x .128) + (.34 x .0398) = .098012 new required return = .098012 - .015 = 8.30%

Take It All Away has a cost of equity of 11.08%, a pretax cost of debt of 5.38%, and a tax rate of 22%. The company's capital structure consists of 68% debt on a book value basis, but debt is 34% of the company's value on a market value basis. What is the company's WACC?

8.74% WACC = (0.66 x 0.1108) + (0.34 x 0.0538) (1 - 0.22) = 8.74%

Wentworth's Five and Dime Store has a cost of equity of 12.4%. The company has an aftertax cost of debt of 4.7%, and the tax rate is 25%. If the company's debt-equity ratio is .84, what is the weighted average cost of capital?

8.88% WACC = (1 / 1.84) (.124) + (0.84 / 1.84) (0.047) = 8.88%

Countless Corporation is expected to pay an annual dividend of $3.91 on its common stock in one year. The current stock price is $67.87 per share. The company announced that it will increase its dividend by 3.15% annually. What is the company's cost of equity?

8.91% cost of equity = ($3.91 / $67.87) + .0315 = 8.91%

Smathers Corporation stock has a beta of .87. The market risk premium is 7.00% and the risk-free rate is 2.89% annually. What is the company's cost of equity?

8.98% cost of equity = 0.0289 + 0.87 (0.07) = 8.98%

The Two Dollar Store has a cost of equity of 11.1%, the YTM on the company's bonds is 5.7%, and the tax rate is 22%. If the company's debt-equity ratio is .46, what is the weighted average cost of capital?

9.00% WACC = (1 / 1.46) (0.111) + (0.46 / 1.46) (0.057) (1 - 0.22) = 0.0900 = 9.00%

The Two Dollar Store has a cost of equity of 11.5%, the YTM on the company's bonds is 6.1%, and the tax rate is 21%. If the company's debt-equity ratio is .50, what is the weighted average cost of capital?

9.27% WACC = (1 / 1.50) (0.115) + (0.50 / 1.50) (0.061) (1 - 0.21) = 0.0927 = 9.27%

Countess Corporation is expected to pay an annual dividend of $4.21 on its common stock in one year. The current stock price is $70.47 per share. The company announced that it will increase its dividend by 3.40% annually. What is the company's cost of equity?

9.37% cost of equity = ($4.21 / $70.47) + .034 = 9.37%

The Two Dollar Store has a cost of equity of 12.8%, the YTM on the company's bonds is 5.3%, and the tax rate is 24%. If the company's debt-equity ratio is .50, what is the weighted average cost of capital?

9.41% WACC = (1 / 1.50) (0.128) + (0.50 / 1.50) (0.053) (1 - 0.24) = 0.0941 = 9.41%

Judy's Boutique just paid an annual dividend of $2.35 on its common stock. The firm increases its dividend by 3.15% annually. What is the company's cost of equity if the current stock price is $38.44 per share?

9.46% cost of equity = (($2.35 x 1.0315) / $38.44) + 0.0315 = 9.46%

Smathers Corporation stock has a beta of .90. The market risk premium is 7.30% and the risk-free rate is 2.95% annually. What is the company's cost of equity?

9.52% cost of equity = 0.0295 + 0.9 (0.073) = 9.52%

Judy's Boutique just paid an annual dividend of $2.41 on its common stock. The firm increases its dividend by 3.20% annually. What is the company's cost of equity if the current stock price is $38.68 per share?

9.63% cost of equity = (($2.41 x 1.032 / $38.68) + .032 = 9.63%

Countless Corporation is expected to pay an annual dividend of $4.51 on its common stock in one year. The current stock price is $73.07 per share. The company announced that it will increase its dividend by 3.65% annually. What is the company's cost of equity?

9.82% cost of equity = ($4.51 / $73.07) + .0365 = 9.82%