Essentials of Corporate Finance, Eighth EditionEssentials of Corporate Finance, Eighth Edition

19. Calculating Capital Structure Weights. Bennington Industrial Machines issued 155,000 zero coupon bonds four years ago. The bonds originally had 30 years to maturity with a yield to maturity of 5.9 percent. Interest rates have recently increased, and the bonds now have a yield to maturity of 6.7 percent. If the company has a $55 million market value of equity, what weight should it use for debt when calculating the cost of capital?

15. Finding the WACC. Given the following information for Janicek Power Co., find the WACC. Assume the companys tax rate is 35 percent.

Debt:

Essentials of Corporate Finance, Eighth Edition

8,500 7.2 percent coupon bonds outstanding, $1,000 par value, 25 years to maturity, selling for 118 percent of par; the bonds make semiannual payments.

Common stock:

Essentials of Corporate Finance, Eighth Edition

225,000 shares outstanding, selling for $87 per share; beta is 1.15.

Preferred stock:

Essentials of Corporate Finance, Eighth Edition

15,000 shares of 4.8 percent preferred stock outstanding, currently selling for $98 per share.

Market:

Essentials of Corporate Finance, Eighth Edition

7 percent market risk premium and 3.1 percent risk-free rate.

16. Organic Produce Corporation has 6.3 million shares of common stock outstanding, 350,000 shares of 5.8 percent preferred stockoutstanding, and 150,000 of 7.1 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $74 per share and has a beta of 1.09, the preferred stock currently sells for $107 per share, and the bonds have 20 years to maturity and sell for 109 percent of par. The market risk premium is 6.8 percent, T-bills are yielding 4.3 percent, and the firms tax rate is 34 percent.

1. What is the firms market value capital structure?
2. Ifthefirmisevaluatinganewinvestmentprojectthathasthesameriskasthefirmstypicalproject,whatrateshouldthefirmusetodiscounttheprojectscashflows?

17. SML and WACC. An all-equity firm is considering the following projects:

Essentials of Corporate Finance, Eighth Edition

Project	Beta	IRR
W X Y Z	.80 .90 1.10 1.35	10.2% 11.4 12.6 15.1

Essentials of Corporate Finance, Eighth Edition

The T-bill rate is 4 percent, and the expected return on the market is 12 percent.

1. Which projects have a higher expected return than the firms 12 percent cost of capital?
2. Which projects should be accepted?
3. Which projects will be incorrectly accepted or rejected if the firms overall cost of capital were used as a hurdle rate?