Project #45249 - Chapter 11

1. 

Suppose that JB Cos. has a capital structure of 76 percent equity, 24 percent debt, and that its before-tax cost of debt is 12 percent while its cost of equity is 16 percent. Assume the appropriate weighted-average tax rate is 25 percent.

 

What will be JB’s WACC? (Round your answer to 2 decimal places.)

 

  WACC  %  

 

2. 

FarCry Industries, a maker of telecommunications equipment, has 2 million shares of common stock outstanding, 1 million shares of preferred stock outstanding, and 10,000 bonds. Suppose the common shares are selling for $24 per share, the preferred shares are selling for $13.00 per share, and the bonds are selling for 97 percent of par.

 

What would be the weight used for equity in the computation of FarCry’s WACC? (Round your answer to 2 decimal places.)

 

  Weight used

 %  

 

3.

JaiLai Cos. stock has a beta of 0.9, the current risk-free rate is 5.9 percent, and the expected return on the market is 13 percent.

 

What is JaiLai’s cost of equity? (Round your answer to 2 decimal places.)

 

  Cost of equity  %  

 

4. 

Suppose that MNINK Industries’ capital structure features 63 percent equity, 7 percent preferred stock, and 30 percent debt. Assume the before-tax component costs of equity, preferred stock, and debt are 11.50 percent, 9.40 percent, and 8.00 percent, respectively.

 

What is MNINK’s WACC if the firm faces an average tax rate of 34 percent? (Round your answer to 2 decimal places.)

 

  WACC  %  

 

5. 

TAFKAP Industries has 4 million shares of stock outstanding selling at $17 per share, and an issue of $24 million in 7.5 percent annual coupon bonds with a maturity of 20 years, selling at 106 percent of par. Assume TAFKAP’s weighted average tax rate is 34 percent and its cost of equity is 12.5 percent.

 

What is TAFKAP’s WACC? (Do not round intermediate calculations and round your final answer to 2 decimal places.)

 

  WACC  %  

 

6. 

 

ILK has preferred stock selling for 98 percent of par that pays a 7 percent annual coupon.

  

What would be ILK’s component cost of preferred stock? (Round your answer to 2 decimal places.)

 

  Cost of preferred stock  %  

 

7. 

Suppose that LilyMac Photography expects EBIT to be approximately $66,000 per year for the foreseeable future, and that it has 300 10-year, 4 percent annual coupon bonds outstanding. (Use Table 11.1)

 

What would the appropriate tax rate be for use in the calculation of the debt component of LilyMac’s WACC?

 

  Tax rate  %  

 

8. 

Suppose that Brown-Murphies’ common shares sell for $24.50 per share, that the firm is expected to set their next annual dividend at $0.77 per share, and that all future dividends are expected to grow by 5 percent per year, indefinitely. Assume Brown-Murphies faces a flotation cost of 15 percent on new equity issues.

 

What will be the flotation-adjusted cost of equity? (Round your answer to 2 decimal places.)

 

  Cost of equity  %  

 

9. 

An all-equity firm is considering the projects shown below. The T-bill rate is 4 percent and the market risk premium is 7 percent.

 

PROJECT   EXPECTED RETURN   BETA  
A     8  %   0.5     
B     22     1.6     
C     15     1.8     
D     19     2.0     

 

Calculate the project-specific benchmarks for each project. (Round your answers to 2 decimal places.)

 

   
  Project A  %  
  Project B  %  
  Project C  %  
  Project D  %  

 

If the firm uses its current WACC of 14 percent to evaluate these projects, which project(s), will be incorrectly accepted?

 

Project A
Project B
Project C
Project D

 

10. 

KatyDid Clothes has a $130 million (face value) 20-year bond issue selling for 102 percent of par that carries a coupon rate of 10 percent, paid semiannually.

 

What would be Katydid’s before-tax component cost of debt? (Round your answer to 2 decimal places.)

 

  Cost of debt  %  

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Due By (Pacific Time) 11/04/2014 12:00 am
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