Deck 11: Calculating the Cost of Capital

Question 1

CJ Co stock has a beta of 0.9, the current risk-free rate is 5.6, and the expected return on the market is 13 percent. What is CJ Co's cost of equity?

A) 12.26%
B) 17.30%
C) 19.50%
D) 22.34%

Answer 1

12.26%

Question 2

FlavR Co stock has a beta of 2.0, the current risk-free rate is 2, and the expected return on the market is 9 percent. What is FlavR Co's cost of equity?

A) 11%
B) 13%
C) 16%
D) 20%

Answer 2

16%

Question 3

This is an estimated WACC computed using some sort of proxy for the average equity risk of the projects in a particular division.

A) Average WACC
B) Divisional WACC
C) Proxy WACC
D) Pure-play WACC

Answer 3

Divisional WACC

Question 4

Which statement makes this a false statement? When a firm pays commissions to underwriting firms that float the issuance of new stock,

A) the component cost will need to be integrated to figure project WACCs.
B) the component cost will need to be integrated only for the firm's WACC.
C) the firm can increase the project's WACC to incorporate the flotation costs' impact.
D) the firm can leave the WACC alone and adjust the project's initial investment upwards.

Question 5

When calculating the weighted average cost of capital, weights are based on

A) book values.
B) book weights.
C) market values.
D) market betas.

Question 6

Which of these statements is true regarding calculating weights for WACC?

A) If we are calculating WACC for the firm, then equity, preferred stock and debt would be the entire book value of each source of capital.
B) If we are calculating WACC for the firm, then equity, preferred stock and debt would be the entire market value of each source of capital.
C) If we are calculating WACC for a project, then equity, preferred stock and debt would be the entire book value of each source of capital.
D) If we are calculating WACC for a project, then equity, preferred stock and debt would be the entire market value of each source of capital.

Question 7

An average of which of the following will give a fairly accurate estimate of what a project's beta will be?

A) flotation beta
B) proxy beta
C) pure-play proxies
D) weighted average beta

Question 8

Which of the following is a true statement regarding the appropriate tax rate to be used in the WACC?

A) One would use the marginal tax rate that the firm paid the prior year.
B) One would use the average tax rate that the firm paid the prior year.
C) One would use the weighted average of the marginal tax rates that would have been paid on the taxable income shielded by the interest deduction.
D) One would use the marginal tax rates that would have been paid on the taxable income shielded by the interest deduction.

Question 9

Which of these makes this a true statement? The WACC formula

A) is not impacted by taxes.
B) uses the after-tax costs of capital to compute the firm's weighted average cost of debt financing.
C) uses the pre-tax costs of capital to compute the firm's weighted average cost of debt financing.
D) focuses on operating costs only to keep them separate from financing costs.

Question 10

TJ Co stock has a beta of 1.45, the current risk-free rate is 5.75, and the expected return on the market is 14 percent. What is TJ Co's cost of equity?

A) 17.71%
B) 21.20%
C) 26.05%
D) 28.64%

Question 11

Which of the following makes this a true statement? Ideally, when searching for a beta for a new line of business

A) one could find other firms engaged in the proposed new line of business and use their betas as proxies to estimate the project's risk.
B) one would like to find at least three or four pure-play proxies.
C) two, or even one, proxies might represent a suitable sample if their line of business resembles the proposed new project closely enough.
D) All the answers make this a true statement.

Question 12

These are fees paid by firms to investment bankers for issuing new securities.

A) flotation costs
B) interest expense
C) seller financing charges
D) user fees

Question 13

Which of these completes this statement to make it true? The constant growth model is

A) always going to have assumptions that will hold true.
B) able to be adjusted for stocks that don't expect constant growth without sizeable errors.
C) only going to be appropriate for the limited number of stocks that just happen to expect constant growth.
D) only going to be appropriate for the limited number of stocks that just happen to expect nonconstant growth.

Question 14

Which of the following makes this a true statement? If the new project does significantly increase the firm's overall risk,

A) the increased risk will be borne equally amongst the bond holders, preferred stockholders, and common stockholders.
B) the increased risk will be borne disproportionately by bond holders.
C) the increased risk will be borne disproportionately by preferred stockholders.
D) the increased risk will be borne disproportionately by common stockholders.

Question 15

An objective approach to calculating divisional WACCs would be done by

A) simply considering the project's risk relative to the firm's lines of business and adjusting upward or downward to account for subjective opinions of project risk.
B) computing the average beta for the firm, the firm's CAPM formula, and the firm's WACC.
C) computing the average beta per division, using these figures for each division in the CAPM formula, and then constructing divisional WACCs.
D) simply averaging out all the WACCs for all the firm's projects.

Question 16

Which of these makes this a true statement? When determining the appropriate weights used in calculating a WACC, it should reflect

A) the relative sizes of the total book capitalizations for each kind of security that the firm issues.
B) the relative sizes of the total market capitalizations for each kind of security that the firm issues.
C) only the market after-tax cost of debt.
D) only the market after-tax cost of equity.

Question 17

This is a principle of capital budgeting which states that the calculations of cash flows should remain independent of financing.

A) generally accepted accounting principle
B) financing principle
C) separation principle
D) WACC principle

Question 18

Which of these statements is true regarding divisional WACC?

A) Using a divisional WACC vs a WACC for the firm's current operations will result in quite a few incorrect decisions.
B) Using a simple firmwide WACC to evaluate new projects would give an unfair advantage to projects that present more risk than the firm's average beta.
C) Using a simple firmwide WACC to evaluate new projects would give an unfair advantage to projects that present less risk than the firm's average beta.
D) Using a firmwide WACC to evaluate new projects would have no impact on projects that present less risk than the firm's average beta.

Question 19

Which of the following is a true statement?

A) To estimate the before-tax cost of debt, we need to solve for the Yield to Maturity (YTM) on the firm's existing debt.
B) To estimate the before-tax cost of debt, we need to solve for the Yield to Call (YTC) on the firm's existing debt.
C) To estimate the before-tax cost of debt, we use the coupon rate on the firm's existing debt.
D) To estimate the before-tax cost of debt, we use the average rate on the firm's existing debt.

Question 20

Which of the following statements is true?

A) If the new project is riskier than the firm's existing projects, then it should be charged a higher cost of capital.
B) If the new project is riskier than the firm's existing projects, then it should be charged a lower cost of capital.
C) If the new project is riskier than the firm's existing projects, then it should be charged the firm's cost of capital.
D) The new project's risk is not a factor in determining its cost of capital.

Question 21

WC Inc. has a $10 million (face value), 10-year bond issue selling for 99 percent of par that pays an annual coupon of 9 percent. What would be WC's before-tax component cost of debt?

A) 9.00%
B) 9.10%
C) 9.16%
D) 18.32%

Question 22

TellAll has 10 million shares of common stock outstanding, 20 million shares of preferred stock outstanding, and 100 thousand bonds. If the common shares are selling for $32 per share, the preferred shares are selling for $20 per share, and the bonds are selling for 106 percent of par, what would be the weight used for preferred stock in the computation of TellAll's WACC?

A) 33.33%
B) 48.43%
C) 55.55%
D) 66.45%

Question 23

Suppose that TipsNToes, Inc.'s capital structure features 40 percent equity, 60 percent debt, and that its before-tax cost of debt is 9 percent, while its cost of equity is 15 percent. If the appropriate weighted average tax rate is 34 percent, what will be TipsNToes' WACC?

A) 9.36%
B) 9.56%
C) 11.40%
D) 24.00%

Question 24

JackITs has 5 million shares of common stock outstanding, 1 million shares of preferred stock outstanding, and 20 thousand bonds. If the common shares are selling for $28 per share, the preferred share are selling for $13.50 per share, and the bonds are selling for 98 percent of par, what would be the weight used for equity in the computation of JackIT's WACC?

A) 33.33%
B) 80.88%
C) 83.08%
D) 91.19%

Question 25

PAW Industries has 5 million shares of common stock outstanding with a market price of $8.00 per share. The company also has outstanding preferred stock with a market value of $10 million, and 100,000 bonds outstanding, each with face value $1,000 and selling at 96% of par value. The cost of equity is 19%, the cost of preferred is 15%, and the cost of debt is 9%. If PAW's tax rate is 34%, what is the WACC?

A) 10.14%
B) 10.38%
C) 12.51%
D) 14.33%

Question 26

PNB Industries has 20 million shares of common stock outstanding with a market price of $18.00 per share. The company also has outstanding preferred stock with a market value of $50 million, and 500,000 bonds outstanding, each with face value $1,000 and selling at 97% of par value. The cost of equity is 15%, the cost of preferred is 12%, and the cost of debt is 8.50%. If PNB's tax rate is 40%, what is the WACC?

A) 7.05%
B) 9.47%
C) 11.31%
D) 11.83%

Question 27

Rose has preferred stock selling for 99 percent of par that pays a 9 percent annual coupon. What would be Rose's component cost of preferred stock?

A) 4.55%
B) 8.91%
C) 9.00%
D) 9.09%

Question 28

Fern has preferred stock selling for 95 percent of par that pays an 8 percent annual coupon. What would be Fern's component cost of preferred stock?

A) 7.60%
B) 8.00%
C) 8.42%
D) 9.00%

Question 29

Solar Shades has 8 million shares of common stock outstanding, 4 million shares of preferred stock outstanding, and 10 thousand bonds. If the common shares are selling for $13 per share, the preferred shares are selling for $30 per share, and the bonds are selling for 105 percent of par, what would be the weight used for equity in the computation of Solar Shades' WACC?

A) 33.33%
B) 44.35%
C) 46.42%
D) 66.61%

Question 30

Suppose that TW, Inc. has a capital structure of 25 percent equity, 15 percent preferred stock, and 60 percent debt. If the before-tax component costs of equity, preferred stock and debt are 13.5 percent, 9.5 percent and 4 percent, respectively, what is TW's WACC if the firm faces an average tax rate of 30%?

A) 6.19%
B) 6.48%
C) 7.2%
D) 9.0%

Question 31

Sports Corp has 10 million shares of common stock outstanding, 5 million shares of preferred stock outstanding, and 1 million bonds. If the common shares are selling for $25 per share, the preferred share are selling for $12.50 per share, and the bonds are selling for 97 percent of par, what would be the weight used for equity in the computation of Sports's WACC?

A) 18.59%
B) 19.49%
C) 62.50%
D) 79.75%

Question 32

Suppose that Glamour Nails, Inc.'s capital structure features 30 percent equity, 70 percent debt, and that its before-tax cost of debt is 4 percent, while its cost of equity is 10 percent. If the appropriate weighted average tax rate is 34 percent, what will be Glamour Nails' WACC?

A) 4.78%
B) 4.85%
C) 5.80%
D) 7.00%

Question 33

Suppose that Hanna Nails, Inc.'s capital structure features 45 percent equity, 55 percent debt, and that its before-tax cost of debt is 5 percent, while its cost of equity is 9 percent. If the appropriate weighted average tax rate is 40 percent, what will be Hanna Nails' WACC?

A) 5.18%
B) 5.70%
C) 6.80%
D) 7.00%

Question 34

Town Crier has 10 million shares of common stock outstanding, 2 million shares of preferred stock outstanding, and 10 thousand bonds. If the common shares are selling for $28 per share, the preferred shares are selling for $15.50 per share, and the bonds are selling for 97 percent of par, what would be the weight used for debt in the computation of Town Crier's WACC?

A) 3.02%
B) 3.12%
C) 3.20%
D) 3.33%

Question 35

TJ Industries has 7 million shares of common stock outstanding with a market price of $20.00 per share. The company also has outstanding preferred stock with a market value of $10 million, and 100,000 bonds outstanding, each with face value $1,000 and selling at 95% of par value. The cost of equity is 12%, the cost of preferred is 10%, and the cost of debt is 6.45%. If TJ's tax rate is 34%, what is the WACC?

A) 8.92%
B) 9.76%
C) 12.59%
D) 13.43%

Question 36

Carrie D's has 6 million shares of common stock outstanding, 2 million shares of preferred stock outstanding, and 10 thousand bonds. If the common shares are selling for $15 per share, the preferred shares are selling for $28 per share, and the bonds are selling for 109 percent of par, what would be the weight used for equity in the computation of Carrie D's WACC?

A) 33.33%
B) 57.36%
C) 61.64%
D) 75.00%

Question 37

Suppose that Model Nails, Inc.'s capital structure features 60 percent equity, 40 percent debt, and that its before-tax cost of debt is 6 percent, while its cost of equity is 10 percent. If the appropriate weighted average tax rate is 28 percent, what will be Model Nails' WACC?

A) 7.73%
B) 8.00%
C) 8.40%
D) 16.00%

Question 38

Bill's Boards has 20 million shares of common stock outstanding, 4 million shares of preferred stock outstanding, and 20 thousand bonds. If the common shares are selling for $30 per share, the preferred shares are selling for $17 per share, and the bonds are selling for 96 percent of par, what would be the weight used for debt in the computation of Bill's WACC?

A) 0.83%
B) 2.79%
C) 2.87%
D) 3.33%

Question 39

IVY has preferred stock selling for 98 percent of par that pays a 7 percent annual coupon. What would be IVY's component cost of preferred stock?

A) 6.86%
B) 7.00%
C) 7.14%
D) 14.00%

Question 40

Paper Exchange has 80 million shares of common stock outstanding, 60 million shares of preferred stock outstanding, and 50 thousand bonds. If the common shares are selling for $20 per share, the preferred shares are selling for $10 per share, and the bonds are selling for 105 percent of par, what would be the weight used for preferred stock in the computation of Paper's WACC?

A) 26.64%
B) 27.27%
C) 33.33%
D) 42.84%

Question 41

FDR Industries has 50 million shares of stock outstanding selling at $30 per share and an issue of $200 million in 9.5 percent, annual coupon bonds with a maturity of 10 years, selling at 105 percent of par ($1000). If FDR's weighted average tax rate is 28 percent and its cost of equity is 16 percent, what is FDR's WACC?

A) 12.75%
B) 14.81%
C) 14.88%
D) 15.11%

Question 42

An all-equity firm is considering the projects shown below. The T-bill rate is 4 percent and the market risk premium is 9 percent. If the firm uses its current WACC of 14 percent to evaluate these projects, which project(s) will be incorrectly rejected?

A) Project A
B) Project B
C) Project C
D) Project D

Question 43

Rings N Things Industries has 40 million shares of common stock outstanding, 20 million shares of preferred stock outstanding, and 50 thousand bonds. If the common shares are selling for $25 per share, the preferred shares are selling for $15 per share, and the bonds are selling for 100 percent of par ($1000), what would be the weights used in the calculation of Ring's WACC for common stock, preferred stock, and bonds, respectively?

A) 33.33%, 33.33%, 33.33%
B) 74.07%, 22.22%, 3.71%
C) 66.61%, 33.31%, 0.08%
D) 17.86%, 10.71%, 71.43%

Question 44

Suppose that Tan Lotion's common shares sell for $18 per share, are expected to set their next annual dividend at $1.00 per share, and that all future dividends are expected to grow by 7 percent per year, indefinitely. If Tan Lotion faces a flotation cost of 12% on new equity issues, what will be the flotation-adjusted cost of equity?

A) 6.37%
B) 7.06%
C) 12.56%
D) 13.31%

Question 45

Suppose that Tan Lines' common shares sell for $20 per share, are expected to set their next annual dividend at $1.00 per share, and that all future dividends are expected to grow by 5 percent per year, indefinitely. If Tan Lines faces a flotation cost of 10% on new equity issues, what will be the flotation-adjusted cost of equity?

A) 5.06%
B) 5.50%
C) 10.00%
D) 10.56%

Question 46

Crab Cakes Ltd. has 5 million shares of stock outstanding selling at $15 per share and an issue of $10 million in 10 percent, annual coupon bonds with a maturity of 25 years, selling at 97 percent of par ($1000). If Crab Cakes' weighted average tax rate is 30 percent, its next dividend is expected to be $1.00 per share, and all future dividends are expected to grow at 5 percent per year, indefinitely, what is its WACC?

A) 8.42%
B) 10.84%
C) 11.16%
D) 11.52%

Question 47

A firm has 1,000,000 shares of common stock outstanding, each with a market price of $10.00 per share. It has 15,000 bonds outstanding, each selling for $900 (with a face value of $1,000). The bonds mature in 15 years, have a coupon rate of 10%, and pay coupons semi-annually. The firm's equity has a beta of 1.5, and the expected market return is 20%. The tax rate is 35% and the WACC is 16%. What is the risk-free rate?

A) 4.8%
B) 11.4%
C) 27.6%
D) 30.0%

Question 48

XYZ Industries has 10 million shares of stock outstanding selling at $10 per share and an issue of $30 million in 8.5 percent, annual coupon bonds with a maturity of 25 years, selling at 102 percent of par ($1000). If XYZ's weighted average tax rate is 40 percent and its cost of equity is 15 percent, what is XYZ's WACC?

A) 8.06%
B) 11.75%
C) 12.65%
D) 13.43%

Question 49

Suppose that Wave Runners' common shares sell for $35 per share, are expected to set their next annual dividend at $2.00 per share, and that all future dividends are expected to grow by 10 percent per year, indefinitely. If Wave faces a flotation cost of 15% on new equity issues, what will be the flotation-adjusted cost of equity?

A) 6.73%
B) 10.07%
C) 15.71%
D) 16.72%

Question 50

An all-equity firm is considering the projects shown below. The T-bill rate is 4 percent and the market risk premium is 8 percent. If the firm uses its current WACC of 13 percent to evaluate these projects, which project(s) will be incorrectly accepted?

A) Project A
B) Project C
C) Project D
D) Projects C and D

Question 51

Accessory Industries has 2 million shares of common stock outstanding, 1 million shares of preferred stock outstanding, and 100 thousand bonds. If the common shares are selling for $22 per share, the preferred shares are selling for $10.50 per share, and the bonds are selling for 96 percent of par ($1000), what would be the weights used in the calculation of Accessory's WACC for common stock, preferred stock, and bonds, respectively?

A) 33.33%, 33.33%, 33.33%
B) 29.23%, 6.98%, 63.79%
C) 64.52%, 32.26%, 3.22%
D) 17.12%, 8.17%, 74.71%

Question 52

JAK Industries has 5 million shares of stock outstanding selling at $25 per share and an issue of $40 million in 8 percent, annual coupon bonds with a maturity of 15 years, selling at 108 percent of par ($1000). If JAK's weighted average tax rate is 34 percent and its cost of equity is 15 percent, what is JAK's WACC?

A) 9.19%
B) 12.36%
C) 12.50%
D) 12.98%

Question 53

Sea Shell Industries has 50 million shares of common stock outstanding, 10 million shares of preferred stock outstanding, and 100 thousand bonds. If the common shares are selling for $19 per share, the preferred shares are selling for $8.50 per share, and the bonds are selling for 97 percent of par ($1000), what would be the weights used in the calculation of Sea Shell's WACC for common stock, preferred stock, and bonds, respectively?

A) 33.33%, 33.33%, 33.33%
B) 83.19%, 16.64%, 0.17%
C) 15.26%, 6.83%, 77.91%
D) 82.92%, 7.51%, 8.57%

Question 54

An all-equity firm is considering the projects shown below. The T-bill rate is 3 percent and the market risk premium is 6 percent. If the firm uses its current WACC of 12 percent to evaluate these projects, which project(s) will be incorrectly rejected?

A) Project A
B) Projects B and C
C) Project D
D) Project B

Question 55

Cup Cake Ltd. has 20 million shares of stock outstanding selling at $25 per share and an issue of $30 million in 8 percent, annual coupon bonds with a maturity of 16 years, selling at 98 percent of par ($1000). If Cup Cake's weighted average tax rate is 34 percent, its next dividend is expected to be $2.00 per share, and all future dividends are expected to grow at 4 percent per year, indefinitely, what is its WACC?

A) 7.94%
B) 10.00%
C) 11.64%
D) 11.79%

Question 56

Suppose that TNT, Inc. has a capital structure of 43 percent equity, 23 percent preferred stock, and 34 percent debt. If the before-tax component costs of equity, preferred stock and debt are 15.4 percent, 10 percent and 7 percent, respectively, what is TNT's WACC if the firm faces an average tax rate of 28%?

A) 9.45%
B) 10.64%
C) 10.80%
D) 11.30%

Question 57

Suppose that Beach Blanket's common shares sell for $55 per share, are expected to set their next annual dividend at $3.00 per share, and that all future dividends are expected to grow by 8 percent per year, indefinitely. If Beach faces a flotation cost of 10% on new equity issues, what will be the flotation-adjusted cost of equity?

A) 5.45%
B) 8.06%
C) 13.45%
D) 14.06%

Question 58

Suppose that PAW, Inc. has a capital structure of 60 percent equity, 10 percent preferred stock, and 30 percent debt. If the before-tax component costs of equity, preferred stock and debt are 17.5 percent, 12 percent and 6.5 percent, respectively, what is PAW's WACC if the firm faces an average tax rate of 28%?

A) 10.71%
B) 12.00%
C) 13.10%
D) 13.65%

Question 59

A firm has 4,000,000 shares of common stock outstanding, each with a market price of $12.00 per share. It has 25,000 bonds outstanding, each selling for $980. The bonds mature in 20 years, have a coupon rate of 9%, and pay coupons semi-annually. The firm's equity has a beta of 1.5, and the expected market return is 15%. The tax rate is 30% and the WACC is 15%. What is the risk-free rate?

A) 6.28%
B) 8.00%
C) 9.22%
D) 19.36%

Question 60

Pumpkin Pie Industries has 5 million shares of common stock outstanding, 1 million shares of preferred stock outstanding, and 10 thousand bonds. If the common shares are selling for $50 per share, the preferred shares are selling for $31 per share, and the bonds are selling for 98 percent of par ($1000), what would be the weights used in the calculation of Pumpkin Pie's WACC for common stock, preferred stock, and bonds, respectively?

A) 33.33%, 33.33%, 33.33%
B) 83.19%, 16.64%, 0.17%
C) 85.97%, 10.67%, 3.38%
D) 27.93%, 17.32%, 54.75%

Question 61

JaiLai Cos. stock has a beta of 1.7, the current risk-free rate is 6.2%, and the expected return on the market is 11%. What is JaiLai's cost of equity?

A) 13.81%
B) 15.19%
C) 13.41%
D) 14.36%

Question 62

OMG Inc. has 4 million shares of common stock outstanding, 3 million shares of preferred stock outstanding, and 5 thousand bonds. If the common shares sell for $17 per share, the preferred shares sell for $126 per share, and the bonds sell for 117% of par ($1000), what weight should you use for preferred stock in the computation of OMG's WACC?

A) 28.91%
B) 31.58%
C) 47.91%
D) 83.66%

Question 63

TAFKAP Industries has 8 million shares of stock outstanding selling at $17 per share and an issue of $20 million in 7.5%, annual coupon bonds with a maturity of 15 years, selling at 109% of par ($1000). If TAFKAP's weighted average tax rate is 34% and its cost of equity is 12.5%, what is TAFKAP's WACC?

A) 11.02%
B) 11.37%
C) 12.16%
D) 12.83%

Question 64

An all-equity firm is considering the projects shown below. The T-bill rate is 4% and the market risk premium is 7%. If the firm uses its current WACC of 12% to evaluate these projects, which project(s), if any, will be incorrectly accepted or rejected?

A) Project A would be incorrectly rejected.
B) Both Projects A and C would be incorrectly rejected.
C) Project A will be incorrectly rejected and Project B would be incorrectly accepted.
D) None of the projects will be incorrectly accepted or rejecteD.Step 1: Find Project Required Returns using CAPM. Project A: 8.2%; Project B: 12.4%; Project C: 13.8%; Project D: 14.5%; Project A would be incorrectly rejected since its required return is only 8.2% given its risk and it is expected to return 9%. Project C would be incorrectly accepted since it should earn 13.8% given its risk.

Question 65

OMG Inc. has 4 million shares of common stock outstanding, 3 million shares of preferred stock outstanding, and 50 thousand bonds. If the common shares are selling for $21 per share, the preferred shares are selling for $10 per share, and the bonds are selling for 111% of par ($1000), what weight should you use for debt in the computation of OMG's WACC?

A) 32.74%
B) 29.86%
C) 25.79%
D) 21.86%

Question 66

An all-equity firm is considering the projects shown below. The T-bill rate is 3% and the market risk premium is 6%. If the firm uses its current WACC of 12% to evaluate these projects, which project(s), if any, will be incorrectly rejected?

A) Only Project A would be incorrectly rejected.
B) Both Projects A and C would be incorrectly rejected.
C) Projects A, B and C would be incorrectly rejected.
D) None of the projects would be incorrectly rejecteD.Step 1: Find Project Required Returns using CAPM. Project A: 7.8%; Project B: 10.2%; Project C: 11.4%; Project D: 12%; only Project A would be incorrectly rejected since its required return is only 7.8% given its risk and it is expected to return 9%.

Question 67

A firm has 5,000,000 shares of common stock outstanding, each with a market price of $10.00 per share. It has 55,000 bonds outstanding, each selling for $990 with a $1000 face value. The bonds mature in 15 years, have a coupon rate of 8%, and pay coupons semi-annually. The firm's equity has a beta of 2.0, and the expected market return is 15%. The tax rate is 35% and the WACC is 16%. Calculate the risk-free rate.

A) 27.68%
B) 1.79%
C) 2.32%
D) 2.12%

Question 68

FarCry Industries, a maker of telecommunications equipment, has 26 million shares of common stock outstanding, 1 million shares of preferred stock outstanding, and 10 thousand bonds. If the common shares sell for $12 per share, the preferred shares sell for $114.50 per share, and the bonds sell for 98% of par ($1000), what weight should you use for preferred stock in the computation of FarCry's WACC?

A) 28.52%
B) 27.51%
C) 26.24%
D) 25.01%

Question 69

A firm has 5,000,000 shares of common stock outstanding, each with a market price of $8.00 per share. It has 25,000 bonds outstanding, each selling for $1100 with a $1000 face value. The bonds mature in 12 years, have a coupon rate of 9%, and pay coupons semi-annually. The firm's equity has a beta of 1.4, and the expected market return is 15%. The tax rate is 35% and the WACC is 14%. Calculate the risk-free rate.

A) 2.05%
B) 15.27%
C) 20.18%
D) 1.19%

Question 70

Suppose your firm has decided to use a divisional WACC approach to analyze projects. The firm currently has 4 divisions, A through D, with average betas for each division of 0.5, 1.0, 1.3 and 1.6, respectively. If all current and future projects will be financed with half debt and half equity, and if the current cost of equity (based on an average firm beta of 1.0 and a current risk-free rate of 7%) is 14% and the after-tax yield on the company's bonds is 8%, what are the WACCs for divisions A through D?

A) 9.00%; 10.25%; 12.95%; 13.15%
B) 9.75%; 12.00%; 12.65%; 13.75%
C) 9.25%; 11.00%; 12.05%; 13.10%
D) 8.95%; 10.15%; 12.50%; 13.45%

Question 71

JLP Industries has 6.5 million shares of common stock outstanding with a market price of $20.00 per share. The company also has outstanding preferred stock with a market value of $10 million, and 25,000 bonds outstanding, each with face value $1,000 and selling at 90% of par value. The cost of equity is 14%, the cost of preferred is 10%, and the cost of debt is 6.25%. If JLP's tax rate is 34%, what is the WACC?

A) 12.39%
B) 12.98%
C) 13.13%
D) 13.72%

Question 72

FarCry Industries, a maker of telecommunications equipment, has 26 million shares of common stock outstanding, 1 million shares of preferred stock outstanding, and 10 thousand bonds. If the common shares sell for $15 per share, the preferred shares sell for $114.50 per share, and the bonds sell for 101% of par ($1000), what weight should you use for preferred stock in the computation of FarCry's WACC?

A) 28.52%
B) 27.51%
C) 26.24%
D) 22.25%

Question 73

Oberon Inc. has a $20 million ($1000 face value) 10-year bond issue selling for 99% of par that pays an annual coupon of 7.25%. What would be Oberon's before-tax component cost of debt?

A) 6.12%
B) 7.02%
C) 7.40%
D) 8.15%

Question 74

Diddy Corp stock has a beta of 1.0, the current risk-free rate is 5%, and the expected return on the market is 15.5%. What is Diddy's cost of equity?

A) 15.50%
B) 14.20%
C) 18.50%
D) 16.30%

Question 75

Johnny Cake Ltd. has 10 million shares of stock outstanding selling at $20 per share and an issue of $50 million in 8%, annual coupon bonds with a maturity of 13 years, selling at 93.5% of par ($1000). If Johnny Cake's weighted average tax rate is 34%, its next dividend is expected to be $2.00 per share, and all future dividends are expected to grow at 5% per year, indefinitely, what is its WACC?

A) 12.64%
B) 13.18%
C) 13.26%
D) 14.06%

Question 76

KatyDid Clothes has a $150 million ($1000 face value) 15-year bond issue selling for 86% of par that carries a coupon rate of 8%, paid semi-annually. What would be KatyDid's before-tax component cost of debt?

A) 4.90%
B) 8.13%
C) 9.80%
D) 7.09%

Question 77

Suppose your firm has decided to use a divisional WACC approach to analyze projects. The firm currently has 2 divisions, A and B, with betas for each division of 0.5 and 1.5, respectively. If all current and future projects will be financed with half debt and half equity, and if the current cost of equity (based on an average firm beta of 1.0 and a current risk-free rate of 5%) is 14% and the after-tax yield on the company's bonds is 6%, what are the WACCs for divisions A and B?

A) 7.75%; 12.25%
B) 8.75%; 12.00%
C) 9.25%; 11.00%
D) 8.95%; 10.15%

Question 78

Marme Inc. has preferred stock selling for 137% of par that pays an 11% annual dividend. What would be Marme's component cost of preferred stock?

A) 11.00%
B) 8.03%
C) 8.17%
D) 10.16%

Question 79

KatyDid Clothes has a $150 million ($1000 face value) 15-year bond issue selling for 106% of par that carries a coupon rate of 8%, paid semi-annually. What would be KatyDid's before-tax component cost of debt?

A) 3.67%
B) 7.34%
C) 8.12%
D) 7.09%

Question 80

FarCry Industries, a maker of telecommunications equipment, has 6 million shares of common stock outstanding, 1 million shares of preferred stock outstanding, and 10 thousand bonds. If the common shares are selling for $27 per share, the preferred shares are selling for $15 per share, and the bonds are selling for 119% of par ($1000), what weight should you use for debt in the computation of FarCry's WACC?

A) 4.93%
B) 5.07%
C) 5.81%
D) 6.30%