FIN780 Ch 8

hil's Carvings, Inc. wants to have a weighted average cost of capital of 9%. The firm has an after-tax cost of debt of 5 % and a cost of equity of 11%. What debt-equity ratio is needed for the firm to achieve its targeted weighted average cost of capital? Multiple Choice .33 .40 .50 .60 .67

.5 9 = 5 (D/V) + 11(E/V) 9 = 5 (D/V) + 11((V-D)/V) 9V = 5D + 11V - 11D-2V = -6D 6(D/V) = 2 D/V = 2/6 If D = 2, and V = 6 then E must equal 4 →(6-2) D/E = 2/4, or 0.5

Slippery Slope Roof Contracting has an equity beta of 1.2, capital structure with 2/3 debt, and a zero tax rate. What is its asset beta? Multiple Choice 0.40 0.72 1.20 1.80 None of the above

0.40 A = (E/(D+E.) β E =(1/3)(1.2) = .4

he cost of equity for Ryan Corporation is 8.4%. If the expected return on the market is 10% and the risk-free rate is 5%, then the equity beta is __. Multiple Choice 0.48 0.68 1.25 1.68 Impossible to calculate with information given.

0.68 R s = R f + β (R m- R f ); .084 = .05 + β (.10-.05); β = .68

ack's Construction Co. has 80,000 bonds outstanding that are selling at par value. Bonds with similar characteristics are yielding 8.5%. The company also has 4 million shares of common stock outstanding. The stock has a beta of 1.1 and sells for $40 a share. The U.S. Treasury bill is yielding 4% and the market risk premium is 8%. Jack's tax rate is 35%. What is Jack's weighted average cost of capital? Multiple Choice 7.10 % 7.39 % 10.38 % 10.65 % 11.37 %

10.38 %

Assuming the CAPM or one-factor model holds, what is the cost of equity for a firm if the firm's equity has a beta of 1.2, the risk-free rate of return is 2%, the expected return on the market is 9%, and the return to the company's debt is 7%? Multiple Choice 10.4% 10.8% 12.8% 14.4% None of the above.

10.4% R s = R f + β (R m- R f ) = .02 + 1.2(.09 - .02) = .104 = 10.4%

Jake's Sound Systems has 210,000 shares of common stock outstanding at a market price of $36 a share. Last month, Jake's paid an annual dividend in the amount of $1.593 per share. The dividend growth rate is 4%. Jake's also has 6,000 bonds outstanding with a face value of $1,000 per bond. The bonds carry a 7 % coupon, pay interest annually, and mature in 4.89 years. The bonds are selling at 99% of face value. The company's tax rate is 34%. What is Jake's weighted average cost of capital? a. 5.3% b. 5.8% c. 6.3% d. 6.9% e. 7.2%

6.9% E = 210,000*36 = 7.56m D1 = $1.593 x 1.04 = $1.65672 To get r e 36 = 1.65672 / r e- g r e = (1.65672 / 36) + g = 0.08602 = 8.602%

Peter's Audio Shop has a cost of debt of 7%, a cost of equity of 11%, and a cost of preferred stock of 8%. The firm has 104,000 shares of common stock outstanding at a market price of $20 a share. There are 40,000 shares of preferred stock outstanding at a market price of $34 a share. The bond issue has a total face value of $500,000 and sells at 102% of face value. The tax rate is 34%. What is the weighted average cost of capital for Peter's Audio Shop? Multiple Choice 6.14% 6.54% 8.60% 9.14% 9.45%

9.14%

The NuPress Valet Co. has an improved version of its hotel stand. The investment cost is expected to be $72 million and will return $13.5 million for 5 years in net cash flows. The ratio of debt to equity is 1 to 1. The cost of equity is 13%, the cost of debt is 9%, and the tax rate is 34%. The appropriate discount rate, assuming average risk, is: Multiple Choice 8.65% 9% 9.47% 10.5% 13%

9.47% WACC = .09(1-.34)(.5) + .13(.5) = .0297 + .065 = .0947 = 9.47%

The Template Corporation has an equity beta of 1.2 and a debt beta of .8. The firm's market value debt to equity ratio is .6. Template has a zero tax rate. What is the asset beta? Multiple Choice 0.70 0.72 0.96 1.04 1.05

The Template Corporation has an equity beta of 1.2 and a debt beta of .8. The firm's market value debt to equity ratio is .6. Template has a zero tax rate. What is the asset beta? A. 0.70 B. 0.72 C. 0.96 D. 1.04 E. 1.05 .8(.6/1.6) + 1.2(1/1.6) = 1.05