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10, 11, 12 B only, 13 U. Te Uulipany president has approached you about the company's capital struc- ture. He wants to know why the
10, 11, 12 B only, 13
U. Te Uulipany president has approached you about the company's capital struc- ture. He wants to know why the company doesn't use more preferred stock financ. ing because it costs less than debt. What would you tell the president? 10. Taxes and WACC [LO3] Lannister Manufacturing has a target debt-equity ratio of .55. Its cost of equity is 11 percent, and its cost of debt is 6 percent. If the tax rate is 21 percent, what is the company's WACC? 11. Finding the Target Capital Structure (LO31 Fama's Llamas has a weighted aver- age cost of capital of 7.9 percent. The company's cost of equity is 11 percent, and its pretax cost of debt is 5.8 percent. The tax rate is 25 percent. What is the company s target debt-equity ratio? 12. Book Value versus Market Value [LO3] Dinklage Corp. has 7 million shares of common stock outstanding. The current share price is $68, and the book value per share is $8. The company also has two bond issues outstanding. The first bond issue has a face value of $70 million, a coupon rate of 6 percent, and sells for 97 percent of par. The second issue has a face value of $40 million, a coupon rate of 6.5 percent, and sells for 108 percent of par. The first issue ma- tures in 21 years, the second in 6 years. Both bonds make semiannual coupon payments. a. What are the company's capital structure weights on a book value basis? b. What are the company's capital structure weights on a market value basis? c. Which are more relevant, the book or market value weights? Why? Calculating the WACC [LO3] In Problem 12. suppose the most recent dividend was $3.25 and the dividend growth rate is 5 percent. Assume that the overall cost of debt is the weighted average of that implied by the two outstanding debt issues. Both bonds make semiannual payments. The tax rate is 21 percent. What is the company's WACCStep by Step Solution
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