Question 16

h. If instead you know that the aftertax cost of debt is 6,8 percent, what is the What do you think about the rationale behind borrowing the entire amount 1. What is your company's weighted average flotation cost, assuming all equiry PART torced confian Folicy 1. If Jungle's cost of equity is 14 percent, what is its pretax cost of debe of equity? 15. Finding the WACC [LO3) Given the following information for Eventlow Power Cotind the WACC Assume the company's tax rate is 35 percent Deht 8.000 6.5 percent coupon bonds outstanding. S1.000 pur value, 20 years to maturity, selling for 92 percent of par; the bonds make semiannual payments Comme tok: 250.000 shares outstanding, selling for $57 per share the bebe is 105 Preferred stork. 15.000 shares of 5 percent preferred stock outstanding. currently selling for $93 per share. Market 8 percent market risk premium and 45 percent risk-free rate 16. Finding the WACC [LO3) Titan Mining Corporation has 9 million shares of common stock outstanding, 250,000 shares of 6 percent preferred stock outstanding, and 105.000 7.5 percent semiannual bonds outstanding, par value of $1.000 cach. The common stock currently sells for $34 per share and has a beta 1.25, the preferred stock currently sells for $91 per share, and the bonds have 15 years to maturity and sell for 93 percent of par. The market risk premium is 85 percent. T-bills are yielding 5 percent, and Titan Mining's tax rate is 35 percent. a. What is the firm's market value capital structure? If Titan Mining 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? 17. SML and WACC [L01] An all-equity firm is considering the following projects: Project Beta Expected Return w 0.80 10% X 0.90 12 Y 1.45 13 1.60 15 z The T-bil rate is 5 percent, and the expected return on the market is 11 perc - Which projects have a higher expected return than the firm's 11 percent cupital? 1. Which projects should be accepted? 6. Which projects would be incorrectly necepted or rejected if the firm's ove cost of capital were used as a hurdle rate? 1. Calculating Flotation Costs [104) Suppose your company needs $20 mil build a new assembly line. Your target deht equity ratio is 0.75. The flotation for new equity is percent, but the flotation cost for debt is only 5 percent. Sous les decided to fund the project by borrowing money because the flotation contare lower and the needed funds are relatively small. the externally