More practice WACC questions - MCGRAWhill

Dani Corporation has 8 million shares of common stock outstanding. The current share price is $82, and the book value per share is $6. The company also has two bond issues outstanding. The first bond issue has a face value of $135 million, a coupon rate of 7 percent, and sells for 93 percent of par. The second issue has a face value of $120 million, a coupon rate of 6 percent, and sells for 102 percent of par. The first issue matures in 25 years, the second in 9 years. Suppose the most recent dividend was $4.90 and the dividend growth rate is 5.4 percent. Assume that the overall cost of debt is the weighted average of that implied by the two outstanding debt issues. The tax rate is 23 percent. What is the company's WACC?

For this question we just have to solve for wacc but there are just a lot of things to keep in mind here because instead of simply given each number which will be relevant in the WACC equation, we must solve for each variable

Fama's Llamas has a weighted average cost of capital of 9.1 percent. The company's cost of equity is 14 percent, and its pretax cost of debt is 6.4 percent. The tax rate is 24 percent. What is the company's target debt-equity ratio?

In this case we need to solve for the debt to equity ratio which we can do by solving inversely using the wacc formula. 9.1% = 14%(Equity) + 4.86%(Debt) now we just have to solve for the corresponding capital structures, however we cant solve if we are missing two different values, but if we remember correctly they are the % of capital structure, so debt is really just (1- % of equity) so replace that with that variable and solve algrebraically for equity and once we have equity we have debt. 1.1557

A stock has a beta of 1.04, the expected return on the market is 10 percent, and the risk-free rate is 3.5 percent. What must the expected return on this stock be?

In this question it is asking for the expected return on the stock. Which is essentially saying what is the cost of equity. That is becasue the return on a stock is the return on something you invest. In otherwords, it is the return that the firm has to pay to its investors, or their cost of equity. In this case we have to solve for the cost of capital. To solve for the cost of capital we will use the CAPM. Beta * Market premium + risk free rate. But because we do not have the market premium we need to calculate for it using the return on market - the risk free rate Which equals 6.5% Thus we do 1.04 * 6.5% + 3.5 percent which is 10.26%

A stock has an expected return of 16.5 percent, its beta is 1.50, and the risk-free rate is 4.5 percent. What must the expected return on the market be?

In this question it relies on the capital asset pricing model as well. But read carefully, it is requiring us not to calculate for the return on the stock (cost of capital) it is asking us to calculate for the return on the market, which is a variable within the CAPM equation. This is why it is so important to read carefully for the questions because it can ask for something part of the equation, not exaclty the normal output. In this case because the cost of equity/return on the stock is 16.5% and the beta is 1.5 and the risk free rate is 4.5, we can solve for the market risk premium (16.5%-4.5%)/1.5 = 0.08 or 8% That means the market risk premium equals 8 percent, but we need to find the return on the market as a whole. To do that we can add the risk free rate to get the return on market 0.08+0.045 = 0.125 or 12.5%

Brannan Manufacturing has a target debt-equity ratio of .60. Its cost of equity is 13 percent, and its cost of debt is 7 percent. If the tax rate is 23 percent, what is the company's WACC?

Same thing as normal in terms of calculating the companies wacc. However the twister here is that we are given the debt to equity ratio. We can use the debt to equity ratio to determine the capital structure. Debt = .6/(1+0.6) = .375 Equity = 0.625 (inverse) Then we use the corresponding costs of debt and equity, but we need to be careful to convert the cost of debt to the after tax cost of debt

Savers has an issue of preferred stock with a $5.85 stated dividend that just sold for $95 per share. What is the bank's cost of preferred stock?

This is a question using parts of the wacc equation. The wacc equation is just a weighted average of how a company finances its operations. In this case the company is using preferred stock to finance its operations and is asking us to find the cost of capital for its preferred stock The cost of capital for preferred stock is just how much they are paying in dividends (or the coupon rate, of a set face value) / the price per share. That is because that shows how much the company has to pay out compared to what they are getting in, or rather the rate on which they pay based on their current weight of capital for preferred stock. in this case it would be 5.85/95 = 6.16% or their cost of capital for preferred stock is 6.16% on their current weight of preferred stock.

Sunrise, Incorporated, is trying to determine its cost of debt. The firm has a debt issue outstanding with 18 years to maturity that is quoted at 109 percent of face value. The issue makes semiannual payments and has an embedded cost of 6 percent annually. a. What is the company's pretax cost of debt b. If the tax rate is 22 percent, what is the aftertax cost of debt?

This is a two part question asking us to find the cost of debt for a company, first we need to find the pretax cost of debt, then we can find the after tax cost of debt by multiplying it by 1-tax rate However, in order to find the pre tax cost of debt, instead of given a easy bond rating, we are given the bond information for which we have to calculate its rate. In order to best do this we need to use excel. The pre tax cost of debt is other words the yield to maturity, or rather the interest rate placed on the bond. In order to calculate that we can use the rate function on excel Where Face value is 1000 where the coupons are 6 percent of face value (60) the bond price is quoted at 109% of 1000 (1090) and there are 18 years. The Face value is 1000 the coupons are the pmts per period # of years is the NPER and the PV is the bond price, Then we can take the after tax cost of debt by getting the after tax value by multiplying by 1-tax rate which is 4.07%

Ninecent Corporation has a target capital structure of 60 percent common stock, 5 percent preferred stock, and 35 percent debt. Its cost of equity is 12 percent, the cost of preferred stock is 8 percent, and the pretax cost of debt is 9 percent. The relevant tax rate is 24 percent. What is the company's WACC? What is the aftertax cost of debt?

This is simply calculating the WACC by pluggin in the values into the wacc equation. Where we use the corresponding weights of their capital structure, part common stock, part preferred stock, part debt tip = common stock = equity solve wacc as normal using each variable wacc = 10% after tax cost of debt = 6.84%