Homework Practice #08

Question 1

The NixonCorporation's common stock has a beta of 1.1. If the risk-free rate is 4.2 percent and the expected return on the market is 12 percent, what is the company's cost of equity capital? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Question 2

One Step, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 17 years to maturity that is quoted at 92 percent of face value. The issue makes semiannual payments and has a coupon rate of 6 percent.

a) What is the company's pretax cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

b) If the tax rate is 23 percent, what is the aftertax cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Question 3

Mullineaux Corporation has a target capital structure of 60 percent common stock and 40 percent debt. Its cost of equity is 12.7 percent, and the cost of debt is 7.4 percent. The relevant tax rate is 22 percent.

What is the company's WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Question 4

Hero Manufacturing has 9 million shares of common stock outstanding. The current share price is $81and the book value per share is $8. The company also has two bond issues outstanding, both with semiannual coupons. The first bond issue has a face value $80 million and a coupon of10 percentand sells for 96 percent of par. The second issue has a face value of $50 million and a coupon of11 percentand sells for 104 percent of par. The first issue matures in 25 years, the second in 8 years.

a. What are the company's capital structure weights on a book value basis? (Do not round intermediate calculations and round your answers to 4 decimal places, e.g., .1616.)

b. What are the company's capital structure weights on a market value basis? (Do not round intermediate calculations and round your answers to 4 decimal places, e.g., .1616.)

c. Which are more relevant?

Option a or b?

a) Market value weights

b) Book value weights

Question 5

Titan Mining Corporation has 8.2 million shares of common stock outstanding and 260,000 4.3 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $30 per share and has a beta of 1.1;the bonds have 10 years to maturity and sell for 110 percent of par. The market risk premium is 7 percent, T-bills are yielding 3 percent, and the company's tax rate is 22 percent.

a. What is the firm's market value capital structure? (Do not round intermediate calculations and round your answers to 4 decimal places, e.g., .3216.)

• What is the debt?
• What is the equity?

b.If the company is evaluating a new investment project that has the same risk as the firm's typical project, what rate should the firm use to discount the project's cash flows? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

• Discount rate (%)

Question 6

Happy Times, Inc., wants to expand its party stores into the Southeast. In order to establish an immediate presence in the area, the company is considering the purchase of the privately held Joe's Party Supply. Happy Times currently has debt outstanding with a market value of $230 million and a YTM of 10 percent. The company's market capitalization is $290 millionand the required return on equity is 15 percent. Joe's currently has debt outstanding with a market value of $27 million. The EBIT for Joe's next year is projected to be $17 million. EBIT is expected to grow at 9 percent per year for the next five years before slowing to 2 percent in perpetuity. Net working capital, capital spending, and depreciation as a percentage of EBIT are expected to be 8 percent, 14 percent, and 7 percent, respectively. Joe's has 2.05 million shares outstanding and the tax rate for both companies is 30 percent.

a. What is the maximum share price that Happy Times should be willing to pay for Joe's? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

b.After examining your analysis, the CFO of Happy Times is uncomfortable using the perpetual growth rate in cash flows. Instead, she feels that the terminal value should be estimated using the EV/EBITDA multiple. The appropriate EV/EBITDA multiple is 9.

What is your new estimate of the maximum share price for the purchase? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)