1. Problems 1 to 5

   You are employed by ABC Inc. Your boss has asked you to estimate the weighted average cost of capital for the company. Following are balance sheets and some information about CGT.

   Assets

   Current assets $30,000,000

   Net plant, property, and equipment $100,000,000

   Total Assets $130,000,000

   Liabilities and Equity

   Accounts payable $10,000,000

   Accruals $10,000,000

   Current liabilities $20,000,000

   Long term debt (40,000 bonds, $1,000 face value) $40,000,000

   Total liabilities $60,000,000

   Preferred Stock (100,000 shares, $100 face value) $10,000,000

   Common Stock (10,000,000 shares) $30,000,000

   Retained Earnings $30,000,000

   Total shareholders equity $70,000,000

   Total liabilities and shareholders equity $130,000,000

   You check The Wall Street Journal and see that ABC stock is currently selling for $8.00 per share and that ABC bonds are selling for $950.0 per bond. These bonds have a 8 percent coupon rate, with semi-annual payments. The bonds mature in twelve years. The preferred stock has an unlimited life and pays an 6 percent annual coupon. The preferred stock sells for $95. The beta for your company is approximately equal to 2. The risk free rate is 4.0 percent and the mrket risk premium is also 4 percent. ABC is in the 40 percent tax bracket.

   WHAT IS THE FIRM'S COST OF COMMON STOCK, Ks?

   		10%
   		11%
   		12%
   		13%
   		14%

4 points

QUESTION 2

1. WHAT IS THE COST OF PREFERRED STOCK, Kps?

   		5.46%
   		4.89%
   		3.99%
   		6.32%
   		8.21%

4 points

QUESTION 3

1. WHAT IS THE AFTER-TAX COST OF DEBT, Kd (1-T)?

   		5.21%
   		4.06%
   		7.89%
   		2.02%
   		6.77%

4 points

QUESTION 4

1. WHICH OF THE FOLLOWING IS THE BEST ESTIMATE FOR THE WEIGHTS TO BE USED WHEN CALCULATING THE WACC?

   		We = 0.63, Wd = 0.30, and Wps = 0.07
   		We = 0.68, Wd = 0.23, and Wps = 0.09
   		We = 0.68, Wd = 0.30, and Wps = 0.02
   		We = 0.66, Wd = 0.28, and Wps = 0.06
   		We = 0.66, Wd = 0.26, and Wps = 0.08

4 points

QUESTION 5

1. What is the best estimate of the WACC for ABC?

   		9.15%
   		9.39%
   		9.55%
   		7.65%
   		8.28%