# finance data bank

Question # 00004155 Posted By: spqr Updated on: 11/26/2013 03:17 AM Due on: 12/28/2013
Subject Finance Topic Finance Tutorials:
Question

9)

 Lanser Inc. hired you as a consultant to help them estimate its cost of capital. You have been provided with the following data: D1 = \$0.80; P0 = \$22.50; and g = 5.00% (constant). Based on the DCF approach, what is the cost of equity from retained earnings? a. 7.34% b. 7.72% c. 8.13% d. 8.56% e. 8.98%

Component

10)

 You were hired as a consultant to Kroncke Company, whose target capital structure is 40% debt, 10% preferred, and 50% common equity. The after-tax cost of debt is 6.00%, the cost of preferred is 7.50%, and the cost of retained earnings is 13.25%. The firm will not be issuing any new stock. What is its WACC? a. 9.48% b. 9.78% c. 10.07% d. 10.37% e. 10.68%

11)

 To help finance a major expansion, Delano Development Company sold a noncallable bond several years ago that now has 15 years to maturity. This bond has a 10.25% annual coupon, paid semiannually, it sells at a price of \$1,025, and it has a par value of \$1,000. If Delano’s tax rate is 40%, what component cost of debt should be used in the WACC calculation? a. 5.11% b. 5.37% c. 5.66% d. 5.96% e. 6.25%

12)

 Chambliss Inc. hired you as a consultant to help estimate its cost of capital. You have been provided with the following data: D0 = \$0.90; P0 = \$27.50; and g = 8.00% (constant). Based on the DCF approach, what is the cost of equity from retained earnings? a. 10.41% b. 10.96% c. 11.53% d. 12.11% e. 12.72%

13)

 You were recently hired by Nast Media Inc. to estimate its cost of capital. You were provided with the following data: D1 = \$2.00; P0 = \$55.00; g = 8.00% (constant); and F = 5.00%. What is the cost of equity raised by selling new common stock? a. 11.24% b. 11.83% c. 12.42% d. 13.04% e. 13.69%

14)

 Schadler Systems is expected to pay a \$3.50 dividend at year end (D1 = \$3.50), the dividend is expected to grow at a constant rate of 6.50% a year, and the common stock currently sells for \$62.50 a share. The before-tax cost of debt is 7.50%, and the tax rate is 40%. The target capital structure consists of 40% debt and 60% common equity. What is the company’s WACC if all equity is from retained earnings? a. 8.35% b. 8.70% c. 9.06% d. 9.42% e. 9.80%

15)

 Roxie Epoxy’s balance sheet shows a total of \$50 million long-term debt with a coupon rate of 8.00% and a yield to maturity of 7.00%. This debt currently has a market value of \$55 million. The balance sheet also shows that that the company has 20 million shares of common stock, and the book value of the common equity (common stock plus retained earnings) is \$65 million. The current stock price is \$8.25 per share; stockholders' required return, rs, is 10.00%; and the firm's tax rate is 40%. Based on market value weights, and assuming the firm is currently at its target capital structure, what WACC should Roxie use to evaluate capital budgeting projects? a. 7.26% b. 7.56% c. 7.88% d. 8.21% e. 8.55%

16)

 Assume that you are on the financial staff of Michelson Inc., and you have collected the following data: (1) The yield on the company’s outstanding bonds is 8.00%, and its tax rate is 40%. (2) The next expected dividend is \$0.65 a share, and the dividend is expected to grow at a constant rate of 6.00% a year. (3) The price of Michelson's stock is \$17.50 per share, and the flotation cost for selling new shares is F = 10%. (4) The target capital structure is 45% debt and the balance is common equity. What is Michelson's WACC, assuming it must issue new stock to finance its capital budget? a. 6.63% b. 6.98% c. 7.34% d. 7.73% e. 8.12%

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