Weighted Average Cost of Capital [WACC}

Questions 20 through 26 refer to the following date for Roadrunner Enterprises.

Use the information below to calculate the Weighted Average Cost of Capital [WACC] for Roadrunner Enterprises.

The company has the following components of its capital structure:

DEBT: 22,750 bonds outstanding with a 6.5% coupon rate, paid annually.

Each bond has $1,000 par value with a 30-year stated maturity,

and were issued five years ago.

The bonds currently sell for 95% of par in the market.

PREFERRED STOCK:

There are 69,400 shares of preferred stock outstanding.

The shares sell for $92.81 in the market.

They pay an annual cash dividend of $6.85 per share.

COMMON STOCK:

There are 255,000 shares of common stock outstanding.

The shares sell for $83.25 in the market and pay an annual cash dividend of $2.35 per share.

The stock has a beta of 1.23.

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The company has a corporate tax rate of 30%.

The expected return of the Market; that is, the S&P500 is 10.12% per year.

T-bills are expected to return 2.58% per year.

20. What's the weight of debt in the capital structure?

a. 30% to 40%

b. 10% to 20%

c. 60% to 70%

d. 70 to 80%

e. 40% to 50%

f. 50% to 60%

g. 0% to 10%

h. 80% to 90%

i. 20% to 30%

j. 90% to 100%

Please refer to the capital structure for Roadrunner Enterprises.

21. What's the weight of preferred stock in the capital structure?

a. 90% to 100%

b. 50% to 60%

c. 20% to 30%

d. 60% to 70%

e. 10% to 20%

f. 70% to 80%

g. 0% to 10%

h. 40% to 50%

i. 80% to 90%

j. 30% to 40%

Please refer to the capital structure for Roadrunner Enterprises.

22. What's the weight of common stock in the capital structure?

a. 10% to 20%

b. 50% to 60%

c. 20% to 30%

d. 70% to 80%

e. 40% to 50%

f. 90% to 100%

g. 0% to 10%

h. 30% to 40%

i. 60% to 70%

j. 80% to 90%

23. What is Roadrunner's after-tax cost of debt?

a. 0% to 1.0%

b. More than 9.0%

c. 4.0% to 5.0%

d. 8.0% to 9.0%

e. 6.0% to 7.0%

f. 3.0% to 4.0%

g. 7.0% to 8.0%

h. 1.0% to 2.0%

i. 2.0% to 3.0%

j. 5.0% to 6.0%

24. What is Roadrunner's cost of preferred stock?

a. 10.0% to 12.0%

b. 16.0% to 18.0%

c. 8.0% to 10.0%

d. 12.0% to 14.0%

e. 4.0% to 6.0%

f. 2.0% to 4.0%

g. 6.0% to 8.0%

h. More than 18.0%

i. 14.0% to 16.0%

j. 0% to 2.0%

25. What is Roadrunner's cost of common stock?

a. More than 18.0%

b. 6.0% to 8.0%

c. 2.0% to 4.0%

d. 14.0% to 16.0%

e. 16.0% to 18.0%

f. 0% to 2.0%

g. 12.0% to 14.0%

h. 10.0% to 12.0%

i. 4.0% to 6.0%

Clear my choice

26. What is Roadrunner's Weighted Average Cost of Capital [WACC}?

a. 0% to 2.0%

b. 8.0% to 10.0%

c. 4.0% to 6.0%

d. 6.0% to 8.0%

e. More than 18.0%

f. 12.0% to 14.0%

g. 10.0% to 12.0%

h. 14.0% to 16.0%

i. 2.0% to 4.0%

j. 16.0% to 18.0%