Cost of Equity Diddy Corp. stock has a beta of 1.2, the current risk-free rate is 5 percent,

and the expected return on the market is 13.5 percent. What is Diddy’s cost of equity?

Cost of Debt Oberon Inc. has a $20 million (face value) 10-year bond issue selling for

97 percent of par that pays an annual coupon of 8.25 percent. What would be Oberon’s

before-tax component cost of debt?

Tax Rate Suppose that LilyMac Photography expects EBIT to be approximately $200,000

per year for the foreseeable future, and that it has 1,000 10-year, 9 percent annual coupon

bonds outstanding. What would the appropriate tax rate be for use in the calculation of

the debt component of LilyMac’s WACC?

Cost of Preferred Stock ILK has preferred stock selling for 97 percent of par that

pays an 8 percent annual coupon. What would be ILK’s component cost of preferred

stock?

Weight of Equity 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. If the common shares are selling for $27 per share, the

preferred shares are selling for $14.50 per share, and the bonds are selling for 98 per-

cent of par, what would be the weight used for equity in the computation of FarCry’s

WACC?

Weight of Equity OMG Inc. has 4 million shares of common stock outstanding, 3 million

shares of preferred stock outstanding, and 5,000 bonds. If the common shares are selling

for $17 per share, the preferred shares are selling for $26 per share, and the bonds are sell-

ing for 108 percent of par, what would be the weight used for equity in the computation of

OMG’s WACC?

WACC Suppose that JB Cos. has a capital structure of 78 percent equity, 22 percent debt,

and that its before-tax cost of debt is 11 percent while its cost of equity is 15 percent. If the

appropriate weighted-average tax rate is 25 percent, what will be JB’s WACC?

WACC Suppose that B2B Inc. has a capital structure of 37 percent equity, 17 percent pre-

ferred stock, and 46 percent debt. If the before-tax component costs of equity, preferred

stock, and debt are 14.5 percent, 11 percent, and 9.5 percent, respectively, what is B2B’s

WACC if the firm faces an average tax rate of 30 percent?

WACC Johnny Cake Ltd. has 10 million shares of stock outstanding selling at $23 per

share and an issue of $50 million in 9 percent annual coupon bonds with a maturity of

17 years, selling at 93.5 percent of par. If Johnny Cake’s weighted-average tax rate is 34 per-

cent, its next dividend is expected to be $3 per share, and all future dividends are expected

to grow at 6 percent per year, indefinitely, what is its WACC?

WACC Weights BetterPie Industries has 3 million shares of common stock outstanding,

2 million shares of preferred stock outstanding, and 10,000 bonds. If the common shares

are selling for $47 per share, the preferred shares are selling for $24.50 per share, and the

bonds are selling for 99 percent of par, what would be the weights used in the calculation

of BetterPie’s WACC?

After-Tax Cash Flow from Sale of Assets Suppose you sell a fixed asset for $109,000 when

its book value is $129,000. If your company’s marginal tax rate is 39 percent, what will be the

effect on cash flows of this sale (i.e., what will be the after-tax cash flow of this sale)?

EAC Approach You are trying to pick the least-expensive car for your new delivery service.

You have two choices: the Scion xA, which will cost $14,000 to purchase and which will have

OCF of 2 $1,200 annually throughout the vehicle’s expected life of three years as a delivery

vehicle; and the Toyota Prius, which will cost $20,000 to purchase and which will have OCF

of 2 $650 annually throughout that vehicle’s expected 4-year life. Both cars will be worthless

at the end of their life. If you intend to replace whichever type of car you choose with the

same thing when its life runs out, again and again out into the foreseeable future, and if your

business has a cost of capital of 12 percent, which one should you choose?

Project Cash Flows KADS Inc. has spent $400,000 on research to develop a new computer

game. The firm is planning to spend $200,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated; they total

$50,000. The machine has an expected life of three years, a $75,000 estimated resale value,

and falls under the MACRS 7-year class life. Revenue from the new game is expected to be

$600,000 per year, with costs of $250,000 per year. The firm has a tax rate of 35 percent, an

opportunity cost of capital of 15 percent, and it expects net working capital to increase by

$100,000 at the beginning of the project. What will the cash flows for this project be?

Subject | Mathematics |

Due By (Pacific Time) | 04/12/2015 05:00 pm |

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