finance data bank
9)
Lanser Inc. hired you as a consultant to help them estimate its cost of capital. You have been provided with the following data: D_{1} = $0.80; P_{0} = $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 aftertax 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: D_{0} = $0.90; P_{0} = $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: D_{1} = $2.00; P_{0} = $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 (D_{1} = $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 beforetax 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 longterm 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% 

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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Solution: finance data bank