Question 1:
An all-equity firm is considering the following projects:
|
Project
|
Beta
|
IRR
|
|
W
|
.69
|
10.3 %
|
|
X
|
.76
|
10.8
|
|
Y
|
1.41
|
14.3
|
|
Z
|
1.52
|
17.3
|
The T-bill rate is 5.3 percent, and the expected return on the market is 12.3 percent.
a. Compared with the firm's 12.3 percent cost of capital, Project W has a expected return, Project X has a expected return, Project Y has a expected return, and Project Z has a expected return.
b. project w should be , project x should be project Y should be and project Z should be.
c. If the firm's overall cost of capital were used as a hurdle rate, Project W would be and Project Z would be
Question 2: Kose, Inc., has a target debt-equity ratio of 1.40. Its WACC is 9.5 percent, and the tax rate is 35 percent.
a. If Kose's cost of equity is 12 percent, what is its pretax cost of debt?
b. If instead you know that the aftertax cost of debt is 5.5 percent, what is the cost of equity?
Question 3:
Fama's Llamas has a weighted average cost of capital of 9.6 percent. The company's cost of equity is 12 percent, and its cost of debt is 7.6 percent. The tax rate is 35 percent. What is Fama's debt-equity ratio?
Question 4:
The Dybvig Corporation's common stock has a beta of 1.5. If the risk-free rate is 5.5 percent and the expected return on the market is 13 percent, what is Dybvig's cost of equity capital?
Question 5:
Filer Manufacturing has 8.9 million shares of common stock outstanding. The current share price is 559, and the book value per share is 54.
Filer Manufacturing also has two bond issues outstanding. The first bond issue has a face value of 571.2 million and a coupon rate of 7.6 percent and sells for 107.7 percent of par.
The second issue has a face value of 561.2 million and a coupon rate of 8.1 percent and sells for 110.1 percent of par. The first issue matures in 8 years, the second in 27 years.
Suppose the company's stock has a beta of 1.2. The risk-free rate is 3.7 percent, and the market risk premium is 7.6 percent. Assume that the overall cost of debt is the weighted average implied by the two outstanding debt issues. Both bonds make semiannual payments. The tax rate is 35 percent. What is the company's WACC?
Question 6:
Mullineaux Corporation has a target capital structure of 70 percent common stock and 30 percent debt. Its cost of equity is 16 percent, and the cost of debt is 8 percent. The relevant tax rate is 30 percent.
What is Mullineaux's WACC?
Question 7:
Miller Manufacturing has a target debt-equity ratio of 0.65. Its cost of equity is 16 percent, and its cost of debt is 5 percent. If the tax rate is 34 percent, what is Miller's WACC?
Question 8:
Advance, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 12 years to maturity that is quoted at 105 percent of face value. The issue makes semiannual payments and has a coupon rate of 6 percent annually.
What is Advance's pretax cost of debt?
If the tax rate is 35 percent, what is the aftertax cost of debt?
Question 9:
Southern Alliance Company needs to raise 550 million to start a new project and will raise the money by selling new bonds. The company will generate no internal equity for the foreseeable future. The company has a target capital structure of 50 percent common stock, 10 percent preferred stock, and 40 percent debt. Flotation costs for issuing new common stock are 6 percent, for new preferred stock, 3 percent, and for new debt, 1 percent.
What is the true initial cost figure Southern should use when evaluating its project?
Question 10:
Filer Manufacturing has 6 million shares of common stock outstanding. The current share price is S72, and the book value per share is S7.
Filer Manufacturing also has two bond issues outstanding. The first bond issue has a face value S70 million, has a coupon of 7 percent, and sells for 97 percent of par. The second issue has a face value of S50 million, has a coupon of 8 percent, and sells for 106 percent of par.
The first issue matures in 22 years, the second in 6 years.
a. What are Filer's capital structure weights on a book value basis?
Equity / Value Debt / Value
b. What are Filer's capital structure weights on a market value basis?
c. Which are more relavent
Market value
book value