Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Question 1 A firm plans to sell 12 million shares of common stock and 200,000 bonds. Each bond will have a coupon rate of

image text in transcribed

Question 1 A firm plans to sell 12 million shares of common stock and 200,000 bonds. Each bond will have a coupon rate of 5% and will have a face value of $1,000. The common stock will be issued at a price of $19.50 a share. The bonds will sell for 89% of face value. The after-tax cost of debt is 4% and the cost of equity is 9.275%. What is the firm's WACC? 9% 8% 6% 7% Question 2 Colt Manufacturing has two divisions: 1) pistols; and 2) rifles. Betas for the two divisions have been determined to be beta (pistol) = 0.7 and beta (rifle) = 1.1. The current risk-free rate of return is 2%, and the expected market rate of return is 7.5%. The after-tax cost of debt for Colt is 8%. The pistol division's financial proportions are 37.5% debt and 62.5% equity, and the rifle division's are 47.5% debt and 52.5% equity. a. What is the pistol division's WACC? % b. What is the rifle division's WACC? % Round your answers to two decimal places. Question 3 Using the balance sheet provided for Universal Exports, determine the weighted average cost of capital. The firm's tax rate is 30%, the preferred stock pays a dividend of $0.50 per share, the beta of the stock is 1.63, the market risk premium is 5%, and the risk-free rate is 3%. Assume that the book value capital structure weights are the company's optimal weights. Universal Exports Balance Sheet ($ millions) Assets Liabilities & Owner's Equity Cash and Short-term securities 3 Bonds (9% annual coupon, 12 10-year maturity, 8% YTM) Accounts receivable 6 Preferred stock (market price = $4.72) Inventories 7 Common stock Plant and equipment 22 Total 38 Total 6 20 38 Enter answers as percentages. Round all answers to two decimal places. a. What is the proportion of debt in the firm's capital structure? b. What is the proportion of preferred stock in the firm's capital structure? c. What is the proportion of common equity in the firm's capital structure? d. What is the after-tax cost of debt for Universal Exports? e. What is the cost of preferred stock for Universal Exports? f. What is the cost of common equity for Universal Exports? Note that the problem gives us the amount of the market risk premium, which is equal to (km-k): % g. What is the WACC for Universal Exports?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Principles Of Managerial Finance

Authors: Lawrence J. Gitman, Chad J. Zutter

13th Edition

9780132738729, 136119468, 132738724, 978-0136119463

More Books

Students also viewed these Finance questions