Question 371 pts

Sorensen Systems Inc. is expected to pay a $2.50 dividend at year end (D₁ = $2.50), the dividend is expected to grow at a constant rate of 5.50% a year, and the common stock currently sells for $40.00 a share. The before-tax cost of debt is 7.50%, and the tax rate is 40%. The target capital structure consists of 45% debt and 55% common equity. What is the companys WACC if all the equity used is from retained earnings? Do not round your intermediate calculations.

Group of answer choices

8.49%

9.42%

6.96%

6.79%

6.45%

Flag question: Question 38

Question 381 pts

For a typical firm, which of the following sequences is CORRECT? All rates are after taxes, and assume that the firm operates at its target capital structure.

Group of answer choices

WACC > r_e > r_s > r_d.

WACC > r_d > r_s > r_e.

r_s > r_e > r_d > WACC.

r_d > r_e > r_s > WACC.

r_e > r_s > WACC > r_d.

Flag question: Question 39

Question 391 pts

Sapp Truckings balance sheet shows a total of noncallable $45 million long-term debt with a coupon rate of 7.00% and a yield to maturity of 6.00%. This debt currently has a market value of $50 million. The balance sheet also shows that the company has 10 million shares of common stock, and the book value of the common equity (common stock plus retained earnings) is $65 million. The current stock price is $28.50 per share; stockholders' required return, r_s, is 14.00%; and the firm's tax rate is 40%. The CFO thinks the WACC should be based on market value weights, but the president thinks book weights are more appropriate. What is the difference between these two WACCs?

Group of answer choices

2.57%

2.03%

2.70%

3.38%

3.11%

Flag question: Question 40

Question 401 pts

Bankston Corporation forecasts that if all of its existing financial policies are followed, its proposed capital budget would be so large that it would have to issue new common stock. Since new stock has a higher cost than retained earnings, Bankston would like to avoid issuing new stock. Which of the following actions would REDUCE its need to issue new common stock?

Group of answer choices

Increase the dividend payout ratio for the upcoming year.

Increase the proposed capital budget.

Reduce the percentage of debt in the target capital structure.

Increase the percentage of debt in the target capital structure.

Reduce the amount of short-term bank debt in order to increase the current ratio.