Question 1.

1. Under what circumstances can you use the constant-growth dividend formula to estimate kos?
2. Vanhoff Line Corp has an equity beta of 1.16 and a debt-to-equity ratio of 1. The expected market portfolio return is 10%. The interest rate of government bonds is 5%. Vanhoff Line can borrow long term at a rate of 6%. The corporate tax is 40%. What is Vanhoff Line's cost of equity ? What is Vanhoff Line's cost of capital ?

Question 2.

1. "Our stock price is currently $60, and our dividend per share is $6. It means that it costs us 10% to use shareholders' cash ($6 dividend by $60).
2. "From our balance sheet our liabilities are $80 million. From our income statement our interest expense is $5 million. Thus, our cost of debt is 6.25% ($5 million divided by $80 million). Which statement is true or false?

Question 3.

1. PacificCom, manufacturers telecommunication equipment and communication software, just received a copy of a consultant's report that strongly recommends that investment proposals be accepted only if their internal rate of return is higher than 8%. The rate of 8% is presented as the WACC of PacificCom and was computed as follows. WACC = 5.78% (1-40%) x 40% + 11% x 60% = 7.99% rounded to 8% Where KD 5.78% is the rate at which PacificCom can borrow from its bank, TC = 40% is the firm's marginal corporate tax, [D/(D+E)] = 40% and [E/(E+D)] = 60% are PacificCom financing ratios, and D and E are the amount of debt and equity taken from the firm's most recent balance sheet, and KE 11% is PacificCom's cost of equity. The rate was calculated using the capital asset pricing model, with a risk-rate equal to the government bond rate of 5%, a market risk premium of 5%, and firm's beta coefficient of 1.2 KE = 5% + [1.2% x 5%] = 11%

Do you agree with the consultant's estimate of PacificCom's cost of capital?

Question 4.

1. The market value of a firm's assets is Rp3 billion. If the market value of the firm's liabilities is Rp2 billion, what is the market value of the shareholders' investment and why?
2. PT Rumah Keju borrowed Rp100 million and is required to pay investors Rp8 million in interest this year. If PT Rumah Keju has 35 per cent marginal tax bracket, then what is the after-tax cost of debt (in rupiah as well as in annual interest) to the company.
3. PT BKK has debt claims of Rp400 million (market value) and equity claims of Rp 600 million (market value). If the cost of debt financing (after tax) is 11 per cent and the cost of equity is 17 per cent, then what is the company's weighted average cost of capital?