Accounting Experts Only

 

Accounting Experts Only

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1. Consider the following information for Evenflow Power Co.,

 

Debt:		2,500 8 percent coupon bonds outstanding, $1,000 par value, 23 years to maturity, selling for 104 percent of par; the bonds make semiannual payments.
Common stock:		55,000 shares outstanding, selling for $60 per share; the beta is 1.08.
Preferred stock:		8,000 shares of 6.5 percent preferred stock outstanding, currently selling for $105 per share.
Market:		10 percent market risk premium and 6 percent risk-free rate.

 

Assume the company’s tax rate is 33 percent.

 

Required:

 

Find the WACC. (Do not round your intermediate calculations.)

rev: 09_121220_2012

a. 11.94%

b. 10.87%

c. 11.13%

d. 10.97%

e. 11.37%

 

= c. 11.13%

 

 

 

 

2. Jiminy’s Cricket Farm issued a bond with 30 years to maturity and a semiannual coupon rate of 8 percent 3 years ago. The bond currently sells for 93 percent of its face value. The company’s tax rate is 35 percent.

 

 

a.

 

What is the pretax cost of debt? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

 

 

Pretax cost of debt ____8.60_____ %

 

 

b.

 

What is the aftertax cost of debt? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

 

 

Aftertax cost of debt ___5.59_____ %

 

 

c. Which is more relevant, the pretax or the aftertax cost of debt?

 

 

After tax cost of debt- it is more relevant because it shows the actual cost a company incurs.

Pretax cost of debt

 

 

 

3. Panelli’s is analyzing a project with an initial cost of $110,000 and cash inflows of $65,000 in year 1 and $74,000 in year 2. This project is an extension of the firm’s current operations and thus is equally as risky as the current firm. The firm uses only debt and common stock to finance its operations and maintains a debt-equity ratio of .45. The aftertax cost of debt is 4.8 percent, the cost of equity is 12.7 percent, and the tax rate is 35 percent. What is the projected net present value of this project?

 

a. $9,840

b. $7,809

c. $8,333

d. $8,938

e. $7,411

= c. $8,938

 

 

4. The Up and Coming Corporation’s common stock has a beta of 1.1. If the risk-free rate is 4.5 percent and the expected return on the market is 15 percent, what is the company’s cost of equity capital? (Do not round your intermediate calculations.)

 

a. 15.25%

b. 16.85%

· c. 16.05%

d. 21%

e. 16.69%

 

 

 

 

 

 

 

 

 

 

 

 

 

5. Titan Mining Corporation has 8.5 million shares of common stock outstanding, 250,000 shares of 5 percent preferred stock outstanding, and 135,000 7.5 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $34 per share and has a beta of 1.25, the preferred stock currently sells for $91 per share, and the bonds have 15 years to maturity and sell for 114 percent of par. The market risk premium is 7.5 percent, T-bills are yielding 4 percent, and Titan Mining’s tax rate is 35 percent.

 

a.

 

What is the firm’s market value capital structure? (Round your answers to 4 decimal places. (e.g., 32.1616))

 

Market value

Debt _$153,900,000______________

Preferred stock __$22,750,000_____________

Equity __$311,285,000____________

 

b.

 

If Titan Mining is evaluating a new investment project that has the same risk as the firm’s typical project, what rate should the firm use to discount the project’s cash flows? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

 

Discount rate ___7.21______ %

 

 

 

6. Stock in Country Road Industries has a beta of 0.82. The market risk premium is 9 percent, and T-bills are currently yielding 3.5 percent. The company’s most recent dividend was $1.9 per share, and dividends are expected to grow at a 4.5 percent annual rate indefinitely. If the stock sells for $37 per share, what is your best estimate of the company’s cost of equity? (Do not round your intermediate calculations.)

 

· 9.87%

b. 9.14%

c. 10.88%

d. 8.01%

e. 10.37%

 

 

 

 

7. Southern Alliance Company needs to raise $26 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 60 percent common stock, 12 percent preferred stock, and 28 percent debt. Flotation costs for issuing new common stock are 12 percent, for new preferred stock, 8 percent, and for new debt, 2 percent. What is the true initial cost figure Southern should use when evaluating its project? (Do not round your intermediate calculations.)

 

a. $29,623,137

b. $24,093,333

c. $28,267,200

d. $27,344,435

· e. $28,483,786

 

 

8. Sixx AM Manufacturing has a target debt—equity ratio of 0.56. Its cost of equity is 18 percent, and its cost of debt is 9 percent. If the tax rate is 32 percent, what is the company’s WACC?

 

a. 11.35%

b. 13.05%

· c. 13.74%

d. 14.42%

e. 10.38%