QUESTION 9 Avery Corporation's target capital structure is 35 debt, 10 preferred, and 55 common equity The interest rate on new debt is 6 50 , the yield on the preferred is 6 00 , the cost of common from reinvested earnings is 11 25 , and the tax rate is 25 The firm will not be issuing any new common stock What is Avery's WACC a 8 49 b 9 55 c 8 83 d 9 19 e 9 94 QUESTION 10 Your consultant firm has been hired by Eco Brothers Inc to help them estimate the cost of common equity The yield on the firm's bonds is 8 75 , and your firm's economists believe that the cost of common can be estimated using a risk premium of 3 85 over a firm's own cost of debt What is an estimate of the firm's cost of common from reinvested earnings a 14 17 b 13 63 c 14 74 d 12 60 e 13 10 Question 11 Which of the following statements is CORRECT a In the WACC calculation, we must adjust the cost of preferred stock (the market yield) to reflect the fact that 50 of the dividends received by corporate investors are excluded from their taxable income b The component cost of preferred stock is expressed as r p (1 T), because preferred stock dividends are treated as fixed charges, similar to the treatment of interest on debt c We should use historical measures of the component costs from prior financings that are still outstanding when estimating a company's WACC for capital budgeting purposes d The cost of new equity (r e ) could possibly be lower than the cost of reinvested earnings (r s ) if the market risk premium, risk free rate, and the company's beta all decline by a sufficiently large amount e A company must try to adjust its current actual market value weights toward its target weights QUESTION 12 You were recently hired by Garrett Design, Inc to estimate its cost of common equity You obtained the following data D 1 $1 75 P 0 $42 50 g L 7 00 (constant) and F 5 00 What is the cost of equity raised by selling new common stock a 11 90 b 10 77 c 12 50 d 13 12 e 11 33 QUESTION 14 The CEO of Harding Media Inc as asked you to help estimate its cost of common equity You have obtained the following data D 0 $0 85 P 0 $22 00 and g L 6 00 (constant) The CEO thinks, however, that the stock price is temporarily depressed, and that it will soon rise to $40 00 Based on the dividend growth model, by how much would the cost of common from reinvested earnings change if the stock price changes as the CEO expects a 1 66 b 1 49 c 2 03 d 2 23 e 1 84 QUESTION 15 Kenny Electric Company's noncallable bonds were issued several years ago and now have 20 years to maturity These bonds have a 9 25 annual coupon, paid semiannually, sells at a price of $1,075, and has a par value of $1,000 If the firm's tax rate is 25 , what is the component cost of debt for use in the WACC calculation a 6 67 b 6 35 c 5 73 d 6 03 e 5 44

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QUESTION 9 Avery Corporation's target capital structure is 35% debt, 10% preferred, and 55% common equity. The interest rate on new debt is 6.50%, the

QUESTION 9

Avery Corporation's target capital structure is 35% debt, 10% preferred, and 55% common equity. The interest rate on new debt is 6.50%, the yield on the preferred is 6.00%, the cost of common from reinvested earnings is 11.25%, and the tax rate is 25%. The firm will not be issuing any new common stock. What is Avery's WACC?

	a.	8.49%
	b.	9.55%
	c.	8.83%
	d.	9.19%
	e.	9.94%

QUESTION 10

Your consultant firm has been hired by Eco Brothers Inc. to help them estimate the cost of common equity. The yield on the firm's bonds is 8.75%, and your firm's economists believe that the cost of common can be estimated using a risk premium of 3.85% over a firm's own cost of debt. What is an estimate of the firm's cost of common from reinvested earnings?

	a.	14.17%
	b.	13.63%
	c.	14.74%
	d.	12.60%
	e.	13.10%

Question 11. Which of the following statements is CORRECT?

	a.	In the WACC calculation, we must adjust the cost of preferred stock (the market yield) to reflect the fact that 50% of the dividends received by corporate investors are excluded from their taxable income.
	b.	The component cost of preferred stock is expressed as r_p(1 T), because preferred stock dividends are treated as fixed charges, similar to the treatment of interest on debt.
	c.	We should use historical measures of the component costs from prior financings that are still outstanding when estimating a company's WACC for capital budgeting purposes.
	d.	The cost of new equity (r_e) could possibly be lower than the cost of reinvested earnings (r_s) if the market risk premium, risk-free rate, and the company's beta all decline by a sufficiently large amount.
	e.	A company must try to adjust its current actual market value weights toward its target weights.

QUESTION 12

You were recently hired by Garrett Design, Inc. to estimate its cost of common equity. You obtained the following data: D ₁ = $1.75; P ₀ = $42.50; g _L = 7.00% (constant); and F = 5.00%. What is the cost of equity raised by selling new common stock?

	a.	11.90%
	b.	10.77%
	c.	12.50%
	d.	13.12%
	e.	11.33%

QUESTION 14

The CEO of Harding Media Inc. as asked you to help estimate its cost of common equity. You have obtained the following data: D ₀ = $0.85; P ₀ = $22.00; and g _L = 6.00% (constant). The CEO thinks, however, that the stock price is temporarily depressed, and that it will soon rise to $40.00. Based on the dividend growth model, by how much would the cost of common from reinvested earnings change if the stock price changes as the CEO expects?

	a.	1.66%
	b.	1.49%
	c.	2.03%
	d.	2.23%
	e.	1.84%

QUESTION 15

Kenny Electric Company's noncallable bonds were issued several years ago and now have 20 years to maturity. These bonds have a 9.25% annual coupon, paid semiannually, sells at a price of $1,075, and has a par value of $1,000. If the firm's tax rate is 25%, what is the component cost of debt for use in the WACC calculation?