FRL 301 - Chapter 14 - Part 2

Cookie Dough Manufacturing has a target debt-equity ratio of 0.5. Its cost of equity is 15 percent, and its cost of debt is 11 percent. What is the firm's WACC given a tax rate of 31 percent? A. 12.53 percent B. 12.78 percent C. 13.11 percent D. 13.48 percent E. 13.67 percent

A. 12.53 percent WACC = (1/1.5)(0.15) + (0.5/1.5)(0.11)(1 - 0.31) = 12.53 percent

Stock in Country Road industries has a beta of .97 percent. The market risk premium is 10 percent while T-bills are currently yielding at 5.5 percent. Country Road's most recent dividend was $1.70 per share, and dividends are expected to grow at 7 percent annual rate indefinitely. The stock sells for $32 a share. What is the estimated cost of equity using the average of the CAPM approach and the dividend discount approach? A. 13.94 percent B. 14.06 percent C. 14.21 percent D. 14.38 percent E. 14.50 percent

A. 13.94 percent Re = 0.055 + 0.97(0.10) = 0.152 Re = [($1.70 x 1.07)/$32] + .07 = 0.12684375 Re Average = (0.152 + 0.12684375)/2 = 13.94 percent

Fama's Llamas has a weighted average cost of capital of 10.5 percent. The company's cost of equity is 15.5 percent, and its pretax cost of debt is 8.5 percent. The tax rate is 34 percent. What is the company's target debt-equity ratio? A. 0.89 B. 0.92 C. 0.98 D. 1.01 E. 1.02

E. 1.02 WACC = 0.105 = 0.155(E/V) + (0.085)(D/V)(1 - 0.34) 0.105(V/E) = 0.155 + (0.085(0.66)(D/E) = 0.155 + 0.0561(D/E) D/E = 1.02

Jungle, Inc. has a target debt-equity ratio of 0.72. Its WACC is 11.5 percent and the tax rate is 34 percent. What is the cost of equity if the aftertax cost of debt is 5.5 percent? A. 13.75 percent B. 13.84 percent C. 14.41 percent D. 14.79 percent E. 15.82 percent

E. 15.82 percent WACC = 0.115 = (1/1.72)Re + (0.72/1.72)(0.055); Re = 15.82 %

Granite Works maintains a debt-equity ratio of 0.65 and has a tax rate of 32 percent. The firm does not issue preferred stock. The pre-tax cost of debt is 9.8 perfect. There are 25,000 shares of stock outstanding with a beta of 1.2 and a market price of $19 a share. The current market risk premium, is 8.5 percent and the current risk-free rate is 3.6 percent. This year, the firm pain an annual dividend of $1.40 a share and expects to increase that amount by 2 percent each year. Using an average expected cost of equity, what is the weighted average cost of capital? A. 8.44 percent B. 8.78 percent C. 8.96 percent D. 9.13 percent E. 9.20 percent

E. 9.20 percent Re= 0.036 +1.2(0.085) = 0.138 Re= [($1.10 x 1.02)$19] +.02 = 0.0790526 ReAverage = (0.138 + 0.0790526)/2 = 0.108526 WACC = (1/1.65)(0.108526) + (0.65/1.65)(0.098)(1-0.32) = 9.20 percent

Sister Pools sells outdoor swimming pools and currently has an aftertax cost of capital of 11.6 percent. Al's Construction builds and sells water features and fountains and has an aftertax cost of capital of 10.8 percent. Sister Pools is considering building and selling its own water features and fountains. The sales manager of Sister Pools estimates that the water features and fountains would produce 20 percent of the firm's future total sales. The initial cash outlay for this project would be $85,000. The expected net cash inflows are $16,000 a year for 7 years. What is the net present value of the Sister Pools Project? A. -$11,044 B. -$9,115 C. -$7,262 D. -$4,508 E. $1,219

NPV = -$85,000 + $16,000 x {[1-(1 + 0.108)^7]/0.108} = -$9,115 Or Cf0= -85,000 Cf1 - 7 = 16,000 I = 10.8 CPT NPV = -9,115

Silo Mills has a beta of 0.87 and a cost of equity of 11.9 percent. The risk-free rate of return is 2.8 percent. The firm is currently considering a project that has a beta of 1.03 and a project life of 6 years. What discount rate should be assigned to this project? A. 13.33 percent B. 13.57 percent C. 13.62 percent D. 13.84 percent E. 14.09 percent

Re = 0.119 = 0.028 + (0.87 x mrp); mrp = 0.1046 Rproject= 0.028 + (1.03 x 0.1046) = 13.57 percent

Samuelson Plastics has 7.5 percent preferred stock outstanding. Currently, this stock has a market value per share of $52 and a book value per share of $38. What is cost of preferred stock?

Rp = (.075 x 100)/$52 = 14.42 percent

Kelso's had a debt-equity ratio of 0.55 and a tax rate of 35 percent. The firm does not issue preferred stock. The cost of equity is 14.5 percent and the aftertax cost of debt is 4.8 percent. What is the weighted average cost of capital? A. 10.46 percent B. 10.67 percent C. 11.06 percent D. 11.38 percent E. 11.57 percent

WACC = (1/1.55)(0.145) + (0.55/1.55)(0.048) = 11.06 percent

R.S. Green has 250,000 shares of common stock outstanding at a market price of $28 a share. Next year's annual dividend is expected to be $1.55 a share. The dividend growth rate is 2 percent. The firm also has 7,500 bonds outstanding with a face value of $1000 per bond. The bonds carry a 7 percent coupon, pay interest semi-annually, and mature in 7.5 years. The bonds are selling at 98 percent of face value. The company's tax rate is 34 percent. What is the firm's weighted average cost of capital? A. 5.4 percent B. 6.2 percent C. 7.5 percent D. 8.5 percent E. 9.6 percent

B. 6.2 percent Debt: 7,500 x $1,000 x 0.98 = $7.35m Common: 250,000 x $28 = $7.00m Total: $14.35m Re = ($1.55/$28) + 0.02 = 0.075357 Enter: N = 7.5 x 2 = 15 PV = -980 PMT = 70/2 = 35 FV = 1,000 Solve: I/Y: 3.675829 x 7.35166 WACC = ($7m/$14.35m)(0.075357) + ($7.35m/$14.35m)(0.0735166)(1 - 0.34) = 6.2 percent

Dog Gone Good Engines has a bond issue outstanding with 17 years to maturity. These bonds have a $1000 face value, a 9 percent coupon, and pay interest semi-annually. The bonds are currently quotes at 87 percent of face value. What is the company's pre-tax cost of debt if the tax rate is 38 percent? A. 4.10 percent B. 4.42 percent C. 6.61 percent D. 8.90 percent E. 10.67 percent

E. 10.67 percent Enter: N = 17 x 2 = 34 PV = -870 PMT = 90/2 = 45 FV = 1000 Solve: I/Y = 5.336585 x 2 = 10.67

You are evaluation a project which required $230,000 in external financing. The flotation cost of equity is 11.6 percent and the flotation cost of debt is 5.4 percent. What is the initial cost of the project including the flotation costs if you maintain a debt-equity ratio of 0.45? A. $248,494 B. $249,021 C. $254,638 D. $255,551 E. $255,646

C. $254,638 Average flotation cost = (1/1.45)(.116) + (.45/1.45)(.054) = 0.0967586 Initial cost = $230,000/(1 - 0.0967586) = $254,638

The Market Outlet has a beta of 1.38 and a cost of equity of 14.945 percent. The risk-free rate of return is 4.25 percent. What discount rate should the firm assign to a new project that has a beta of 1.25? A. 13.54 percent B. 13.72 percent C. 13.94 percent D. 14.14 percent E. 14.36 percent

C. 13.94 percent Re = 0.14945 = 0.0425 + (1.38 x mrp); mrp = 0.0775 Rproject=0.0425 + (1.25 x 0.0775) = 13.94 percent

Boulder Furniture has bonds outstanding that mature in 13 years, have a 6 percent coupon, and pay interest annually. These bonds have a face value of $1,000 and a current market price of $1,040. What is the company's aftertax cost of debt if its tax rate is 32 percent? A. 2.97 percent B. 3.32 percent C. 3.78 percent D. 5.21 percent E. 5.53 percent

C. 3.78 percent Enter: N= 13 PV = -1,040 PMT = 60 FV = 1,000 Solve for: I/Y = 5.5597 Aftertax Rd = 0.055597 x (1 - 0.32) = 3.78 percent

Handy Man, Inc. has zero coupon bonds outstanding that mature in 8 years. The bonds have a face value of $1,000 and a current market price of $640. What is the company's pre-tax cost of debt? A. 2.55 percent B. 5.09 percent C. 5.66 percent D. 7.31 percent E. 7.48 percent

C. 5.66 percent Enter: N = 8 x 2 = 16 (zero coupon bonds are semi-annual) PV = -640 FV = 1000 Solve for: I/Y = 2.82 x 2 = 5.66

Simple Foods has a zero coupon bound issue outstanding that matures in 9 years. The bonds are selling at 42 percent of par value. What is the company's after tax cost of debt if the tax rate is 38 percent? A. 5.48 percent B. 5.73 percent C. 6.12 percent D. 7.73 percent E. 9.88 percent

C. 6.12 percent Enter: N = 9 x 2 = 18 PV = -420 FV = 1000 Solve: I/Y = 4.937471 x 2 = 9.874843 Aftertax Rd = 9.874943 x (1 - 0.38) = 6.12 percent

Holdup Bank has an issue of preferred stock with a $5 stated dividend that just sold for $92 a share. What is the bank's cost of preferred? A. 4.60 percent B. 4.64 percent C. 5.39 percent D. 5.43 percent E. 5.54 percent

D. 5.43 percent Rp = $5/$92 = 5.43

Grill Works are More has 8 percent preferred stock outstanding that is currently selling for $49 a share. The market rate of return is 14 percent and the firm's tax rate is 37 percent. What is the firm's cost of preferred stock? A. 14.77 percent B. 15.29 percent C. 15.67 percent D. 16.33 percent E. 16.54 percent

Rp = (0.08 x $100)/$49 = 16.33 percent

The Oil Derrick has an overall cost of equity of 13.6 percent and a beta of 1.28. The firm is financed solely with common stock. The risk-free rate of return is 3.4 percent. What is an appropriate cost of capital for a division within the firm that has an estimated beta of 1.18? A. 12.37 percent B. 12.41 percent C. 12.54 percent D. 12.67 percent E. 12.80 percent

E. 12.80 percent 0.136 = 0.034 + 128mrp; mrp= 0.0796875 ReDivision = 0.034 + 1.18)0.0796875) = 12.80 percent

Western Wear is considering a project that requires an initial investment of $274,000. The firm maintains a debt-equity ratio of 0.40 and has a flotation cost of debt of 7 percent and a flotation cost of equity of 10.5 percent. The firm has sufficient internally generated equity to cover the equity portion of this project. What is the initial cost of the project including the flotation costs? A. $279,592 B. $281,406 C. $288,005 D. $297,747 E. $302, 762

A. $279,592 Average flotation cost = (1/1.40)(0) + (.40)(1.40)(0.07) = 0.02 Initial cost = $274,000/(1 - 0.02) = $279,592

Decker's is a chain of furniture retail stores. Furniture Fashions is a furniture maker and a supplier to Decker's. Decker's has a beta of 1.38 as compared to Furniture Fashion's beta of 1.12. The risk-free rate of return is 3.5 percent and the market risk premium is 8 percent. What discount rate should Decker's use if it considers a project that involves manufacturing of furniture? A. 12.46 percent B. 12.92 percent C. 13.50 percent D. 14.08 percent E. 14.54 percent

A. 12.46 percent Re = 0.035 + 1.12(0.08) = 12.46 percent

Decline, Inc. is trying to determine its cost of debt. The firm has a debt issue outstanding with 15 years to maturity that is quoted at 107 percent of face value. The issue makes semiannual payments and has an embedded cost of 11 percent annually. What is the aftertax cost of debt if the tax rate is 33 percent. A. 6.76 percent B. 6.90 percent C. 7.17 percent D. 7.37 percent E. 7.42 percent

A. 6.76 percent Enter: N = 15 x 2 = 30 PV = -1,070 FV = 1000 PMT = 11% of 1000 = 110 that is divided by 2 because of semi annual payments = 55 Solve: I/Y= 5.042435 x 2 = 10.085 Rd = 10.085(1 - .33) =6.76 percent

Carson Electronics uses 70 percent common stock and 30 percent debt to finance its operations. The aftertax cost of debt is 5.4 percent and cost of equity is 15.4 percent. Management is considering a project that will produce a cash inflow of $36,000 in the first year. The cash inflows will then grow at 3 percent per year forever. What is the maximum amount the firm can initially invest in this project to avoid a negative net present value for the project? A. $299,032 B. $382,979 C. $411,406 D. $434,086 E. $441,414

B. $382,979 WACC = 0.70(0.154) + 0.30(0.054) = 0.124 PV = $36,000/(0.124 = 0.03) = $382,979

Yesteryear Productions is considering a project with an initial start up cost of $960,000. The firm maintains a debt-equity ratio of 0.50 and has a flotation cost of debt of 6.8 percent and a flotation cost of equity of 11.4 percent. The firm has sufficient internally generated equity to cover the cost of this project. What is the initial cost of the project including the flotation costs? A. $979,417 B. $982,265 C. $992,386 D. $1,038,513 E. $1,065,089

B. $982,265 Average flotation costs = (1/1.5)(0) + (0.5/1.5)(0.068) = 0.0226667 Initial cost = $960,000/(1 - 0.0226667) = $982,265

The Bakery is considering a new project it considers to be a little riskier than its current operations. Thus, management has decide to add an additional 1.5 percent to the company's overall cost of capital when evaluating this project. The project has an initial cash outlay of $62,000 and projected cash inflows of $17,000 in year one, $28,000 in year two, and $30,000 in year three. The firm uses 25 percent debt and 75 percent common stock as its capital structure. The company's cost of equity is 15.5 percent while the aftertax cost of debt for the firm is 6.1 percent. What is the projected net present value of the new project? A. -$6,208 B. -$5,964 C. -$2,308 D. $1,427 E. $1, 573

B. -$5,964 WACC firm = (0.75 x 0.155) + (0.25 x 0.061) = 0.1315 WACC project = 0.1315 + 0.015 = 0.1465 NPV = -$62,000 + ($17,000/1.1465) + ($28,000/1.1465^2) + ($30,000/1.1465^3) = -$5,964

Delta Lighting has 30,000 shares of common stock outstanding at a market price of $17.50 a share. This stock was originally issued at $31 per share. The firm also has a bond issue outstanding with a total face value of $280,000 which is selling for 86 percent of par. The cost of equity is 16 percent while the aftertax cost of debt is 6.9 percent. The firm has a beta of 1.48 and a tax rate of 30 percent. What is the weighted average cost of capital? A. 11.07 percent B. 13.14 percent C. 14.36 percent D. 15.29 percent E. 15.47 percent

B. 13.14 percent Common: 30,000 x $17.50 = $525,000 Debt: $280,000 x 0.86 = $240,800 Total: $765,800

Suppose your company needs $14 million to build a new assembly line. Your target debt-equity ratio is .84. The flotation cost for new equity is 9.5 percent, but the flotation cost for debt is only 2.5 percent. What is the true cost of building the new assembly line after taking flotation costs into account? A. 14.82 m B. 14.94 m C. 15.07 m D. 15.12 m E. 15.23 m

B. 14.94 m fA = (1/1.84)(0.095) + (0.84/1.84)(0.025) = 0.063043 Amount raised = $14m/(1 - 0.063043) = 14.94 milion

Miller Sisters has an overall beta of 0.64 and a cost of equity of 11.2 percent for the firm overall. The firm is 100 percent finances with common stock. Division A within the firm has an estimated beta of 1.08 and is the riskiest of all the firm's operations. What is an appropriate cost of capital for division A if the market risk premium is 9.5 percent? A. 15.12 percent B. 15.38 percent C. 15.63 percent D. 15.77 percent E. 16.01 percent

B. 15.38 percent 0.112 = rf + 0.64(0.095); rf = 0.0512 ReDivision = 0.0512 + 1.08(0.095) = 15.38 percent

Jiminy's Cricket Farm issued a 30 year, 8 percent, semiannual bond 6 years ago. The bond currently sells for 114 percent of its face value. What is the aftertax cost of debt if the company's tax rate is 31 percent. A. 4.63 percent B. 4.70 percent C. 4.75 percent D. 4.82 percent E. 4.86 percent

B. 4.70 percent Enter: N = 24 x 2 = 48 PV = -1,140 PMT = 80/2 = 40 FV = 1000 Solve: I/Y = 3.404 = 6.81 0.0681(1 - 0.31) = 4.70 percent

Nelson's Landscaping has 1,200 bonds outstanding that are selling for $990 each. The company also has 2,500 shares of preferred stock at a market price of $28 a share. The common stock is priced at $37 a share and there are 28,000 shares outstanding. What is the weight of the common stock as it relates to the firm's weighted average cost of capital? A. 43.08 percent B. 45.16 percent C. 47.11 percent D. 54.00 percent E. 55.45 percent

B. 45.16 percent Debt: 1200 x $990 = $1,1880,000 Preferred: 2,500 x $28 = $70,000 Common: 28,000 x $37 = $1,036,000 Total = $2,294,000 Weight of Common Stock = 1,036,000/2,249,000 = 45.16

The Daily Brew has a debt-equity ratio of 0.72. The firm is analyzing a new project which required an initial cash outlay of $420,000 for equipment. The flotation cost is 9.6 percent for equity and 5.4 percent for debt. What is the initial cost of the project including the flotation costs? A. $302,400 B. $368,924 C. $455,738 D. $456,400 E. $583,333

C. $455,738 Average flotation cost = (1/1.72)(0.096) + (0.72/1.72)(0.054) = 0.0784186 Initial cost = $420,000/(1-0.0784186) = $455,738

Muliineaux Corporation has a target capital structure of 41 percent common stock, 4 percent preferred stock, and 55 percent debt. Its cost of equity is 19 percent, the cost of preferred stock is 6.5 percent, and the pre-tax cost of debt is 7.5 percent. What is the firm's WACC given a tax rate of 34 percent? A. 9.87 percent B. 10.43 percent C. 10.77 percent D. 13.38 percent E. 15.17 percent

C. 10.77 percent WACC = 0.41(0.19) + (0.04)(0.65) + (0.55)(.075)(1 - 0.34) = 10.77 percent

The City Street Corporation's common stock has a beta of 1.2. The risk-free rate is 3.5 percent and the expected return on the market is 13 percent. What is the firm's cost of equity? A. 11.4 percent B. 12.8 percent C. 14.9 percent D. 17.6 percent E. 19.1 percent

C. 14.9 percent Re = 0.035 + 1.2(0.13 - 0.035) = 14.9 percent

Justice, Inc. has a capital structure which is based on 30 percent debt, 5 percent preferred stock, and 65 percent common stock. The flotation costs are 11 percent for common stock, 10 percent for preferred stock, and 7 percent for debt. The corporate tax rate is 37 percent. What is the weighted average flotation cost? A. 8.97 percent B. 9.38 percent C. 9.62 percent D. 9.75 percent E. 10 percent

C. 9.62 percent D. 9.75 percent Average flotation cost = (.65 x .11) + (.05 x .10) + (.30 x .07) = 9.75 percent

Central Systems, Inc. desires a weighted average cost of capital of 8 percent. The firm has an aftertax cost of debt of 4.8 percent and a cost of equity of 15.2 percent. What debt-equity ratio is needed for the firm to achieve its targeted weighted average cost of capital? A. 0.38 B. 0.44 C. 1.02 D. 2.25 E. 2.63

D. 2.25 WACC = 0.08 = [We x 0.152] +[(1 - We) x 0.048)] We = 0.3077; Wd = 1 - We = 0.6923 Debt-equity ratio = 0.6923/0.3077 = 2.25

The outstanding bonds of Tech Express are priced at $989 and mature in 8 years. These bonds have a 6 percent coupon and pay interest annually. The firm's tax rate is 39%. What is the firm's aftertax cost of debt? A. 3.01 percent B. 3.22 percent C. 3.35 percent D. 3.77 percent E. 4.41 percent

D. 3.77 percent Enter: N= 8 PV= -989 PMT= 60 FV = 1000 Solve: I/Y = 6.1784 Aftertax Rd = 0.061784 x (1-0.39) = 3.77 percent

Electronic Galore has 950,000 shares of common stock outstanding at a market price of $38 a share. The company also has 40,000 bonds outstanding that are quoted at 106 percent of face value. What weight should be given to the debt when the firm computes its weighted average cost of capital? A. 42 percent B. 46 percent C. 50 percent D. 54 percent E. 58 percent

D. 54 percent Debt: 40,000 x $1000 x 1.06 = $42.4m Common: 950,000 x $38 = $36.1m Total: 78.5m Weight of Debt = $42.4m/$78.5m = 54 percent.

The Corner Bakery has a bond issue outstanding that matures in 7 years. The bonds pay interest semi-annually. Currently, the bonds are quotes at 101.4 percent of face value and carry a 9 percent coupon. What is the firm's aftertax cost of debt if the tax rate is 30 percent? A. 4.88 percent B. 5.36 percent C. 5.45 percent D. 6.11 percent E. 8.74 percent

D. 6.11 percent Enter: N = 7 x 2 = 14 PV = -1,014 PMT = 90/2 = 45 FV = 1,000 I/Y = 4.364257 x 2 = 8.728513 Aftertax Rd = 0.087285 x (1 - 0.30) = 6.11 percent

Deep Mining and Precious Metals are separate firms that are both considering a silver exploration project. Deep Mining is in the actual mining business and has an aftertax cost of capital of 12.8 percent. Precious Metals is in the precious gem retail business and has an aftertax cost of capital of 10.6 percent. The project under consideration has initial costs of $575,000 and anticipated annual cash inflows of $102,000 a year for 10 years. Which firm(s), if either, should accept this project? A. Company A only B. Company B only C. both Company A and Company B D. neither Company A or B E. Cannot be determined without further information.

D. neither Company A or B NPV = -$575,000 + $102,000 x {(1-[(1/(1 + 0.128)]^10}/0.128] = $-17,071 Compute using calculator: Co = -525,000 Cf1 -10 = 102,000 I = 12.8% CPT NPV = -17,071 Neither company should accept this project as the applicable discount rate for both firms is 12.8 percent and the NPV is negative at this discount rate.

Panelli's is analyzing a project with initial cost of $102,000 and cash inflows of $65,000 in year one and $74,000 in year two. This project is an extension of the firm's current operations and thus is equally risky as the current firm. The firm uses only debt and common stock to finance its operations and maintains a debt-equity ratio of 0.45. The aftertax cost of debt is 4.8 percent, the cost of equity is 12.7 percent, and the tax rate is 35 percent. What is the projected net present value of this project? A. $15,411 B. $15,809 C. $16,333 D. $16,938 E. $17,840

E. $17,840 WACC = (1/1.45)(0.127) + (0.45/1.45)(0.048) = Cfo= -$102,000 C01 = $65,000 Co2 = $74,000 I = 10.2483% NPV = 17,840

Wayco Industrial Supply has a pre-tax cost of debt of 7.6 percent, a cost of equity of 14.3 percent, and a cost of preferred stock of 8.5 percent. The firm has 220,000 shares of common stock outstanding at a market price of $27 a share. There are 25,000 shares of preferred stock outstanding at a market price of $41 a share. The bond issue has a face value of $550,000 and a market quote of 101.2. The company's tax rate is 37 percent. What is the firm's weighted average cost of capital? A. 10.18 percent B. 10.84 percent C. 11.32 percent D. 12.60 percent E. 12.81 percent

E. 12.81 percent Debt: $550,000 x 1.102 = $556,600 Preferred: 25,000 x $41 = $1,025,00 Common: 220,000 x 27 = $5,940,000 Total: $7,521,600 WACC = ($5,940,000/$721,600)(0.143) + ($1,025,000/$7,521,000)(0.085) + ($556,600/$7,521,600)(0.76)(1-0.37) = 12.81 percent

Titan Mining Corporation has 14 million shares of common stock outstanding, 900,000 shares of 9 percent preferred stock outstanding and 210,000 ten percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $34 per share and has a beta of 1.15, the preferred stock currently sells for $80 per share, and the bonds have 17 years to maturity and sell for 91 percent of par. The market risk premium is 11.5 percent, T-bills are yielding 7.5 percent, and the firm's tax rate is 32 percent. What discount rate should the firm apply to a new project's cash flows if the project has the same risk as the firm's typical project? A. 14.59 percent B. 14.72 percent C. 15.17 percent D. 15.54 percent E. 16.41 percent

E. 16.41 percent MVd = 210,000 ($1000) (0.91) = $191,100,000 MVe = 14,000,000 ($34) = $476,000,000 MVp = 900,000 ($80) = $72,000,000 = $739,100,000 V = $191,100,000 + 476,000,000 + 72,000,000 = $739,100,000 D/V =191.1m/739.1m =0.258558 E/V = $476m/739.1m = 0.644027 P/V = $72m/739.1m = 0.097416 Re = 0.075 + 1.15(0.115) = 0.20725 Rp = $9/$80 = 0.1125 Enter: N = 17 x 2 = 34 PV = -910 PMT = 100/2 = 50 FV = 1,000 Solve: I/Y: 5.597571 x2 =11.195143 Rd Aftertax = 0.11195143 (1 - 0.32) = 0.076127 WACC = 0.644027(0.20725) + 0.097416(0.1125) + 0.258558(0.076127) = 16.41 percent

Bleakly Enterprises has a capital structure of 55 percent common stock, 10 percent preferred stock, and 35 percent debt. The flotation costs are 4.5 percent for debt, 7 percent for preferred stock, and 9.5 percent for common stock. The corporate tax is 34 percent. What is the weighted average flotation cost? A. 5.8 percent B. 6.2 percent C. 6.7 percent D. 7.0 percent E. 7.5 percent

E. 7.5 percent Average flotation cost = (0.55 x 0.095) + (0.10 x 0.07) + (0.35 x 0.045) = 7.5 percent

Travis & Sons has a capital structure which is based on 40 percent debt, 5 percent preferred stock, and 55 percent common stock. The pre-tax cost of debt is 7.5 percent, the cost of preferred is 9 percent, and the cost of common stock is 13 percent. The company's tax rate is 39 percent. The company is considering a project that is equally as risky as the overall firm. This project has initial costs of $325,000 and annual cash inflows of $87,000, $279,00, and $116,000 over the next three years, respectively. What is the projected net present value of this project? A. 68,211.04 B. 68,879.97 C. 69,361.08 D. 74,208.18 E. 76,011.23

E. 76,011.23 WACC = (0.55 x 0.13) + (0.05 x 0.09) + [0.40 x 0.075 x (1 - 0.39)] = 0.0943 NPV = -325,000 + ($87,000/1.0943) + ($279,000/1.0943^2) + ($116,000/1.0943^3) = $76,011.23

Mangrove Fruit Farms has $200,000 bond issue outstanding that is selling at 92 percent of face value. The firm also has 1,500 shares of preferred stock and 15,000 shares of common stock outstanding. The preferred stock has a market price of $35 a share compared to a price of $24 share for the common stock. What is the weight of preferred stock as it related to the firm's weighted average cost of capital? A. 6.75 percent B. 7.20 percent C. 7.75 percent D. 8.30 percent E. 8.80 percent

E. 8.80 percent Debt: $200,000 x 0.92 = $184,000 Preferred: 1500 x $35 = $52,500 Common: 15,000 x $24 =360,000 Total = 596,500 Weight of Preferred Stock = $52,500/$596,500 = 8.80 percent

Phillps Equipment has 80,000 bonds outstanding that are selling at par. Bonds with similar characteristics are yielding at 6.75 percent. The company also has 7500,000 shares of 7 percent preferred stock and 2.5 million shares of common stock outstanding. The preferred stock selling for $53 a share. The common stock has a beta of 1.34 and sells for $42 a share. The U.S. Treasury bill is yielding 2.8 percent and the return on the market is 11.2 percent. The corporate tax rate is 38 percent. What is the firm's weighted average cost of capital? A. 10.39 percent B. 10.64 percent C. 11.18 percent D. 11.30 percent E. 11.56 percent

Re = 0.028 + 1.34(0.112 - 0.028) = 0.14056 Rp= (0.07 x $100)/$53 = 0.13208 Debt: 80,000 x $1,000 = $80m Preferred: 750,000 x $53 = $39.75m Common: 2.5m x $42 = $105m Total: $224.75m WACC = ($105m/$224.75m)(0.14056) + ($39.75m/$224.75m)(0.13208) + ($80m/224.75m)(0.0675)(1 - 0.38) = 10.39 percent

New York Deli's has 7 percent preferred stock outstanding that sells for $36 a share. This stock was originally issues at $50 per share. What is the cost of preferred stock?

Rp =(.07 x 100)/$36 = 19.44 percent