1A)

The board of directors for Avery Brothers Inc. has decided to set a target capital structure that consists of 50 % common stock, 25 % preferred stock, and 25 % debt. The firm has a current cost of equity of 7.7 %, a cost of preferred stock of 5.1 %, and a pre-tax cost of debt of 4.6 %. If the firm faces a marginal tax rate of 23 %, what is their WACC?

a. 4.94 %

b. 7.31 %

c. 6.01 %

d. 8.61 %

e. 4.39 %

1B)

Which of the following is true concerning the capital structure weights that we use to calculate the weighted average cost of capital?

a. depend on the firms tax rate

b. are based on the book values of total debt and total equity

c. are computed using the book value of the long-term debt and the book value of equity

d. are based on the market value of the firms debt and equity securities

e. remain constant over time unless the firm issues new securities

1C)

You are the manager of a team of analysts working for a major bank. Your team approaches you with a potential project they think the bank should invest in. They present evidence to you that the proposed project has a beta of 2.31. The T-bill rate is 3% (risk-free rate) and the return on the market is 10%. What is the appropriate expected return on the new project? (Answer as a percentage and round to 2 decimals.)

a. 20.54 %

b. 19.17 %

c. 20.47 %

d. 17.97 %

e. 20.70 %