1:

Granite Works maintains a debt-equity ratio of .65 and has a tax rate of 32 percent. The pre-tax cost of debt is 9.8 percent. 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 paid an annual dividend of $1.10 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?

8.96 percent

8.44 percent

8.78 percent

9.13 percent

9.20 percent

2:

Jiminy's Cricket Farm issued a 30-year, 7 percent semi-annual bond 3 years ago. The bond currently sells for 91 percent of its face value. The book value of the debt issue is $19 million. The company's tax rate is 34 percent.

In addition, the company has a second debt issue on the market, a zero coupon bond with 3 years left to maturity; the book value of this issue is $83 million and the bonds sell for 80 percent of par.

Required:

(a)	What is the company's total book value of debt? (Do not round your intermediate calculations.)
	(Click to select)125,150,000124,320,00083,690,00078,850,000102,000,000

(b)	What is the company's total market value of debt? (Do not round your intermediate calculations.)
	(Click to select)83,690,00079,505,50087,037,60087,874,500102,000,000

(c)

What is your best estimate of the aftertax cost of debt? (Do not round your intermediate calculations.)

(Click to select)5.7%5.03%5.43%3.81%4.78%

3:

Desert Rose, Inc., a prominent consumer products firm, is debating whether to convert its all-equity capital structure to one that is 30 percent debt. Currently, there are 9,000 shares outstanding, and the price per share is $64. EBIT is expected to remain at $40,500 per year forever. The interest rate on new debt is 8.5 percent, and there are no taxes.

a.	Allison, a shareholder of the firm, owns 300 shares of stock. What is her cash flow under the current capital structure, assuming the firm has a dividend payout rate of 100 percent? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Cash flow

$

b.	What will Allisons cash flow be under the proposed capital structure of the firm? Assume she keeps all 300 of her shares. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Cash flow

$

c.	Assume that Allison unlevers her shares and re-creates the original capital structure. What is her cash flow now? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Total Cash flow

$