corporation finance test bank chapter 14

Chapter 14 - Cost of Capital

62. Phillips Equipment has 80,000 bonds outstanding that are selling at par. Bonds with similar characteristics are yielding 6.75 percent. The company also has 750,000 shares of 7 percent preferred stock and 2.5 million shares of common stock outstanding. The preferred stock sells for $53 a share. The common stock has a beta of 1.34 and sells for $42 a share. The U.S.

Treasury bill is yielding 2.8 percent and the return on the market is 11.2 percent. The corporate tax rate is 38 percent. What is the firm's weighted average cost of capital? A. 10.39 percent B. 10.64 percent C. 11.18 percent D. 11.30 percent E. 11.56 percent

Re = 0.028 + 1.34 (0.112 - 0.028) = 0.14056 Rp = (0.07 ? $100)/$53 = 0.13208

WACC = ($105m/$224.75m) (0.14056) + ($39.75m/$224.75m) (0.13208) + ($80m/$224.75m) (0.0675) (1 - 0.38) = 10.39 percent

AACSB: Analytic Bloom's: Analysis Difficulty: Basic

Learning Objective: 14-3 Section: 14.4 Topic: WACC

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Chapter 14 - Cost of Capital

63. Wayco Industrial Supply has a pre-tax cost of debt of 7.6 percent, a cost of equity of 14.3 percent, and a cost of preferred stock of 8.5 percent. The firm has 220,000 shares of common stock outstanding at a market price of $27 a share. There are 25,000 shares of preferred stock outstanding at a market price of $41 a share. The bond issue has a face value of $550,000 and a market quote of 101.2. The company's tax rate is 37 percent. What is the firm's weighted average cost of capital? A. 10.18 percent B. 10.84 percent C. 11.32 percent D. 12.60 percent E. 12.81 percent

WACC = ($5,940,000/$7,521,600) (0.143) + ($1,025,000/$7,521,600) (0.085) + ($556,600/$7,521,600) (0.076) (1 - 0.37) = 12.81 percent

AACSB: Analytic Bloom's: Analysis Difficulty: Basic

Learning Objective: 14-3 Section: 14.4 Topic: WACC

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Chapter 14 - Cost of Capital

64. Central Systems, Inc. desires a weighted average cost of capital of 8 percent. The firm has an aftertax cost of debt of 4.8 percent and a cost of equity of 15.2 percent. What debt-equity ratio is needed for the firm to achieve its targeted weighted average cost of capital? A. 0.38 B. 0.44 C. 1.02 D. 2.25 E. 2.63

WACC = 0.08 = [We ? 0.152] + [(1 - We) ? 0.048)] We = 0.3077; Wd = 1 - We = 0.6923

Debt-equity ratio = 0.6923/0.3077 = 2.25

AACSB: Analytic Bloom's: Analysis Difficulty: Basic

Learning Objective: 14-3 Section: 14.4

Topic: Debt-equity ratio

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Chapter 14 - Cost of Capital

65. R.S. Green has 250,000 shares of common stock outstanding at a market price of $28 a share. Next year's annual dividend is expected to be $1.55 a share. The dividend growth rate is 2 percent. The firm also has 7,500 bonds outstanding with a face value of $1,000 per bond. The bonds carry a 7 percent coupon, pay interest semiannually, and mature in 7.5 years. The bonds are selling at 98 percent of face value. The company's tax rate is 34 percent. What is the firm's weighted average cost of capital? A. 5.4 percent B. 6.2 percent C. 7.5 percent D. 8.5 percent E. 9.6 percent

AACSB: Analytic Bloom's: Analysis Difficulty: Basic

Learning Objective: 14-3 Section: 14.4 Topic: WACC

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