Chapter 14: Cost of Capital

If the market value of debt is $45 million and the market value of equity is $105 million, the total firm value is _____

$150 million

Dang's Donuts has EBIT of $25,432, depreciation of $1,500, and a tax rate of 21%. The company will not be changing its net working capital, but plans a capital expenditure of $6,324. What is Dang's adjusted cash flow from assets?

$25,432 + $1,500 - $5,340.72 - $6,324 = $15,267.28

What are the after-tax earnings for HIJ Corp if it reports $200 in revenue, $90 in operating expenses, has a tax rate of 21% , and pays $20 in interest on its bonds

($200 - $90 - $20) x (1 - 0.21) = $71.1

A firm's capital structure consists of 30% debt and 70% equity. Its bond yield 10%, pretax, its cost of equity is 16%, and the tax rate is 21%. What is its WACC?

(0.7 x 0.16) + (0.3 x .1 x (1 - 0.21)) = .1357 ---> 13.57%

Which of the following statements regarding book value is true?

*ideally, we should use market values in WACC *book values are often similar to market values for debt

To estimate the growth rate of a particular stock, we can ________

*use the historical dividend growth rate *use security analysts' forecasts

Under US tax law what is tax deductible?

A corporation's interest payments

True or False: Economic Value Added (EVA) is a mean of evaluating corporate performance

True

ULC and LEV have earnings before interest and taxes of $110. LEV also has $20 of interest expense. Both companies are taxed at 21%, ULC's aftertax earnings are ______, which is _______ than LEV's aftertax earnings.

ULC = $110 x (1 - .21) = $86.9 LEV = $90 x (1 - .21) = $71.1 Answer: $86.9; $15.8 greater

A firm's capital structure consists of 40% debt and 60% equity. The after-tax yield on debt is 2.5% and the cost of equity is 15%. The project is about risky as the overall firm. What discount rate should be used to estimate the project's net present value?

WACC = .4 x 2.5% + .6 x 15% = 10%