40. The common stock of Faraday Chemical, Inc. has 19.4 percent less systematic risk than the overall market. Currently, the market risk premium is 7.1 percent while the U.S. Treasury bill is yielding 6.1 percent. What is Faraday's cost of equity (in percents)? 39. The market rate of return is 10.2 percent and the risk-free rate is 4.6 percent. Lagrangian Motion Systems has 35 percent more systematic risk than the market and has a growth rate of 6.3 percent. The firm's stock is currently selling for $58 a share and has a dividend yield of 4 percent. What is the firm's cost of equity (in percents)? 38. Riemann's currently has a weighted average cost of capital of 8.6 percent based on a combination of debt and equity financing. The firm has no preferred stock. The current debt-equity ratio is 0.67 and the aftertax cost of debt is 6.9 percent. The company just hired a new president who is considering eliminating all debt financing. All else constant, what will the firm's cost of capital (in percents) be if the firm switches to an all-equity firm? 37. A firm wants to create a weighted average cost of capital (WACC) of 9.7 percent. The firm's cost of equity is 11.1 percent and its pre-tax cost of debt is 9.2 percent. The tax rate is 32.7 percent. What does the debt-equity ratio need to be for the firm to achieve its target WACC? 36. The Burger Stop has 80,000 shares of common stock outstanding at a price of $28 a share. It also has 15,000 shares of preferred stock outstanding at a price of $63 a share. There are five hundred 8.5 percent bonds outstanding that are priced at par. The bonds mature in 14 years, pay interest semiannually, and have a face value of $1,000. What is the capital structure weight of the preferred stock? 18.87 percent 21.21 percent 25.64 percent 26.29 percent 32.18 percent 35. Southern Distributors has two bond issues outstanding. The first issue has a coupon rate of 11 percent, matures in 2 years, has a total face value of $5 million, and is quoted at 111 percent of face value. The second issue has an 8.5 percent coupon, matures in 13 years, has a total face value of $25 million, and is quoted at 98 percent of face value. Both bonds pay interest semiannually. What is the firm's weighted average aftertax cost of debt if the tax rate is 34 percent? 7.54 percent 8.09 percent 4.78 percent 5.34 percent 7.97 percent 31. Which of the following will affect the capital structure weights of a firm? I. decrease in the book value of a firm's equity II. decrease in a firm's tax rate III. increase in the market value of the firm's common stock IV. increase in the firm's debt-equity ratio Can Be Multiple 30. Which one of the following statements is correct concerning capital structure weights? The issuance of additional shares of common stock will decrease the weight of the preferred stock. The repurchase of preferred stock will not affect the weight of the debt. Capital structure weights are constant over time. An increase in the debt-equity ratio will increase the weight of the common stock. A new bond issue will not affect the weight of the firm's preferred stock. 29. What is the name given to the process of assigning discount rates to projects by utilizing a stair step method that assigns projects to various risk classes? pure play approach adjustment factoring subjective approach normative classification divisional rating