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1. Award: 2.00 points The Muse Co. just issued a dividend of $2.55 per share on its common stock. The company is expected to maintain a constant 5.30 percent growth rate in its dividends indefinitely. If the stock sells for $51 a share, what is the company's cost of equity? (Round your answer to 2 decimal places. (e.g., 32.16)) Cost of equity % Hints References WorksheetDifficulty: BasicLearning Objective: 14-01 How to determine a firms cost of equity capital. 2. Award: 2.00 points Stock in Dragula Industries has a beta of 1.2. The market risk premium is 6 percent, and T-bills are currently yielding 5.30 percent. The company's most recent dividend was $1.70 per share, and dividends are expected to grow at a 5.0 percent annual rate indefinitely. If the stock sells for $35 per share, what is your best estimate of the company's cost of equity? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Cost of equity % References WorksheetDifficulty: BasicLearning Objective: 14-01 How to determine a firms cost of equity capital. 3. Award: 2.00 points Suppose In a Found Ltd. just issued a dividend of $2.24 per share on its common stock. The company paid dividends of $1.80, $1.98, $2.05, and $2.16 per share in the last four years. If the stock currently sells for $45, what is your best estimate of the company's cost of equity capital using the arithmetic average growth rate in dividends? (Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16)) % Cost of equity What if you use the geometric average growth rate? (Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16)) % Cost of equity rev: 11_28_2013_QC_41378, 12_06_2013_QC_41378, 12_12_2013_QC_42527 References WorksheetDifficulty: BasicLearning Objective: 14-01 How to determine a firms cost of equity capital. 4. Award: 2.00 points Holdup Bank has an issue of preferred stock with a $4.55 stated dividend that just sold for $82 per share. What is the bank's cost of preferred stock? (Round your answer to 2 decimal places. (e.g., 32.16)) Preferred stock % Hints References WorksheetDifficulty: BasicLearning Objective: 14-01 How to determine a firms cost of equity capital. 5. Award: 2.00 points Mudvayne, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 11 years to maturity that is quoted at 104 percent of face value. The issue makes semiannual payments and has an embedded cost of 4 percent annually. What is the company's pretax cost of debt? (Do not round intermediate calculation and round your answer to 2 decimal places. (e.g., 32.16)) Cost of debt % If the tax rate is 35 percent, what is the aftertax cost of debt? (Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16)) Cost of debt % Hints References WorksheetDifficulty: BasicLearning Objective: 14-02 How to determine a firms cost of debt. 6. Award: 2.00 points Jiminy's Cricket Farm issued a 10-year, 8 percent semiannual bond 3 years ago. The bond currently sells for 96 percent of its face value. The company's tax rate is 35 percent. a. What is the pretax cost of debt? (Do not round intermediate calculation and round your answer to 2 decimal places. (e.g., 32.16)) Cost of debt % b. What is the aftertax cost of debt? (Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16)) Cost of debt % c. Which is more relevant, the pretax or the aftertax cost of debt? Aftertax cost of debt Pretax cost of debt Hints References WorksheetDifficulty: BasicLearning Objective: 14-02 How to determine a firms cost of debt. 7. Award: 2.00 points Jiminy's Cricket Farm issued a 16-year, 6 percent semiannual bond 2 years ago. The bond currently sells for 91 percent of its face value. The company's tax rate is 38 percent. Suppose the book value of the debt issue is $40 million. In addition, the company has a second debt issue on the market, a zero coupon bond with 11 years left to maturity; the book value of this issue is $30 million, and the bonds sell for 50 percent of par. What is the company's total book value of debt? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.) Total book value $ What is the company's total market value of debt? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.) $ Total market value What is your best estimate of the aftertax cost of debt? (Round your answer to 2 decimal places. (e.g., 32.16)) Cost of debt % References WorksheetDifficulty: BasicLearning Objective: 14-02 How to determine a firms cost of debt. 8. Award: 2.00 points Mullineaux Corporation has a target capital structure of 70 percent common stock, 10 percent preferred stock, and 20 percent debt. Its cost of equity is 12 percent, the cost of preferred stock is 6 percent, and the pretax cost of debt is 8 percent. The relevant tax rate is 40 percent. a. What is Mullineaux's WACC? (Round your answer to 2 decimal places. (e.g., 32.16)) % WACC b. What is the aftertax cost of debt? (Round your answer to 2 decimal places. (e.g., 32.16)) % Cost of debt Hints References WorksheetDifficulty: BasicLearning Objective: 14-03 How to determine a firms overall cost of capital. 9. Award: 2.00 points Sixx AM Manufacturing has a target debtequity ratio of 0.65. Its cost of equity is 13 percent, and its cost of debt is 9 percent. If the tax rate is 40 percent, what is the company's WACC? (Round your answer to 2 decimal places. (e.g., 32.16)) WACC % Hints References WorksheetDifficulty: BasicLearning Objective: 14-03 How to determine a firms overall cost of capital. 10. Award: 2.00 points Fama's Llamas has a weighted average cost of capital of 10.1 percent. The company's cost of equity is 13 percent, and its pretax cost of debt is 8.1 percent. The tax rate is 40 percent. What is the company's target debtequity ratio? (Do not round intermediate calculations and round your final answer to 4 decimal places. (e.g., 32.1616)) Debtequity ratio Hints References WorksheetDifficulty: BasicLearning Objective: 14-03 How to determine a firms overall cost of capital. 11. Award: 2.00 points Erna Corp. has 6 million shares of common stock outstanding. The current share price is $89, and the book value per share is $8. Erna Corp. also has two bond issues outstanding. The first bond issue has a face value of $85 million, has a coupon of 6 percent, and sells for 96 percent of par. The second issue has a face value of $60 million, has a coupon of 7 percent, and sells for 109 percent of par. The first issue matures in 21 years, the second in 9 years. a. What are Erna's capital structure weights on a book value basis? (Round your answer to 4 decimal places. (e.g., 32.1616)) Equity/Value Debt/Value b. What are Erna's capital structure weights on a market value basis? (Round your answer to 4 decimal places. (e.g., 32.1616)) Equity/Value Debt/Value c. Which are more relevant, the book or market value weights? Market value Book value Hints References WorksheetDifficulty: BasicLearning Objective: 14-03 How to determine a firms overall cost of capital. 12. Award: 2.00 points Erna Corp. has 8 million shares of common stock outstanding. The current share price is $74, and the book value per share is $5. Erna Corp. also has two bond issues outstanding. The first bond issue has a face value of $80 million, has a coupon rate of 9 percent, and sells for 95 percent of par. The second issue has a face value of $60 million, has a coupon rate of 10 percent, and sells for 108 percent of par. The first issue matures in 24 years, the second in 8 years. Suppose the most recent dividend was $4.60 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 35 percent. What is the company's WACC? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) WACC % References WorksheetDifficulty: BasicLearning Objective: 14-03 How to determine a firms overall cost of capital. 13. Award: 2.00 points Paget, Inc., has a target debtequity ratio of 1.40. Its WACC is 9.5 percent, and the tax rate is 35 percent. a. If the company's cost of equity is 12 percent, what is its pretax cost of debt? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) % Cost of debt b. If instead you know that the aftertax cost of debt is 5.5 percent, what is the cost of equity? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) % Cost of equity References WorksheetDifficulty: BasicLearning Objective: 14-03 How to determine a firms overall cost of capital. 14. Award: 2.00 points You are given the following information for Lightning Power Co. Assume the company's tax rate is 30 percent. Debt: 6,000 7.9 percent coupon bonds outstanding, $1,000 par value, 25 years to maturity, selling for 108 percent of par; the bonds make semiannual payments. Common stock: 510,000 shares outstanding, selling for $69 per share; the beta is 1.12. Preferred stock: 29,000 shares of 4 percent preferred stock outstanding, currently selling for $89 per share. Market: 10 percent market risk premium and 5.90 percent risk-free rate. What is the company's WACC? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) WACC % Hints References WorksheetDifficulty: BasicLearning Objective: 14-03 How to determine a firms overall cost of capital. 15. Award: 2.00 points Suppose your company needs $14 million to build a new assembly line. Your target debtequity ratio is 0.60. The flotation cost for new equity is 7 percent, but the flotation cost for debt is only 4 percent. Your boss has decided to fund the project by borrowing money because the flotation costs are lower and the needed funds are relatively small. a. What is your company's weighted average flotation cost, assuming all equity is raised externally? (Round your answer to 2 decimal places. (e.g., 32.16)) % Flotation cost b. What is the true cost of building the new assembly line after taking flotation costs into account? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567. Do not round intermediate calculations and round your final answer to the nearest whole dollar amount.(e.g., 32) Amount raised $ References WorksheetDifficulty: BasicLearning Objective: 14-04 How to correctly include flotation costs in capital budgeting projects. 16. Award: 2.00 points Scanlin, Inc., is considering a project that will result in initial aftertax cash savings of $1.86 million at the end of the first year, and these savings will grow at a rate of 2 percent per year indefinitely. The firm has a target debt-equity ratio of 0.80, a cost of equity of 12.6 percent, and an aftertax cost of debt of 5.4 percent. The cost-saving proposal is somewhat riskier than the usual project the firm undertakes; management uses the subjective approach and applies an adjustment factor of 3 percent to the cost of capital for such risky projects. What is the maximum initial cost the company would be willing to pay for the project? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567. Do not round intermediate calculations and round your final answer to the nearest whole dollar amount.) Maximum cost $ References WorksheetLearning Objective: 14-03 How to determine a firms overall cost of capital. Difficulty: IntermediateLearning Objective: 14-05 Some of the pitfalls associated with a firms overall cost of capital and what to do about them. 17. Award: 2.00 points Ying Import has several bond issues outstanding, each making semiannual interest payments. The bonds are listed in the following table. Bond 1 2 3 4 Coupon Rate 6.3% 7.8 7.5 7.1 Price Quote Maturity 106.16 5 years 114.82 8 years 113.37 15.5 years 102.61 25 years Face Value $ 43,000,000 38,000,000 58,000,000 53,000,000 If the corporate tax rate is 34 percent, what is the aftertax cost of Ying's debt? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Cost of debt % References WorksheetDifficulty: IntermediateLearning Objective: 14-02 How to determine a firms cost of debt. 18. Award: 2.00 points Berta Industries stock has a beta of 1.30. The company just paid a dividend of $0.30, and the dividends are expected to grow at 4 percent. The expected return on the market is 13 percent, and Treasury bills are yielding 5.1 percent. The most recent stock price for Berta is $68. a. Calculate the cost of equity using the DCF method. (Round your answer to 2 decimal places. (e.g., 32.16)) % DCF method b. Calculate the cost of equity using the SML method. (Round your answer to 2 decimal places. (e.g., 32.16)) % SML method References WorksheetDifficulty: IntermediateLearning Objective: 14-01 How to determine a firms cost of equity capital. 19. Award: 2.00 points Photochronograph Corporation (PC) manufactures time series photographic equipment. It is currently at its target debtequity ratio of 0.75. It's considering building a new $41 million manufacturing facility. This new plant is expected to generate aftertax cash flows of $5.3 million in perpetuity. The company raises all equity from outside financing. There are three financing options: 1. A new issue of common stock: The flotation costs of the new common stock would be 7.1 percent of the amount raised. The required return on the company's new equity is 15 percent. 2. A new issue of 20-year bonds: The flotation costs of the new bonds would be 3.0 percent of the proceeds. If the company issues these new bonds at an annual coupon rate of 6.0 percent, they will sell at par. 3. Increased use of accounts payable financing: Because this financing is part of the company's ongoing daily business, it has no flotation costs, and the company assigns it a cost that is the same as the overall firm WACC. Management has a target ratio of accounts payable to long-term debt of 0.10. (Assume there is no difference between the pretax and aftertax accounts payable cost.) What is the NPV of the new plant? Assume that PC has a 38 percent tax rate. (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567. Do not round intermediate calculations and round your final answer to the nearest whole dollar amount.) NPV $ References WorksheetLearning Objective: 14-03 How to determine a firms overall cost of capital. Difficulty: ChallengeLearning Objective: 14-04 How to correctly include flotation costs in capital budgeting projects. 20. Award: 2.00 points Trower Corp. has a debtequity ratio of 0.90. The company is considering a new plant that will cost $108 million to build. When the company issues new equity, it incurs a flotation cost of 7.8 percent. The flotation cost on new debt is 3.3 percent. What is the initial cost of the plant if the company raises all equity externally? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567. Do not round intermediate calculations and round your final answer to the nearest whole dollar amount.) Initial cash flow $ What is the initial cost of the plant if the company typically uses 60 percent retained earnings? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567. Do not round intermediate calculations and round your final answer to the nearest whole dollar amount.) Initial cash flow $ What is the initial cost of the plant if the company typically uses 100 percent retained earnings? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567. Do not round intermediate calculations and round your final answer to the nearest whole dollar amount.) Initial cash flow $ References WorksheetDifficulty: ChallengeLearning Objective: 14-04 How to correctly include flotation costs in capital budgeting projects. 2016 McGraw-Hill Education. All rights reserved