finance data bank

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%

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%

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%

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%

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%

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%

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, r_s, 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%

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%