Question 1

The long-term debt of Topstone Industries is currently selling for 104.50% of its face value. The issue matures in 10 years and pays an annual coupon of 8%. What is the cost of debt?

Accepted Answer

The answer of The long-term debt of Topstone Industries is...

Question 2

A ﬁrm has three bond issues outstanding as shown below. Based on this information what is the weighted average cost of debt?

Accepted Answer

The answer of A ﬁrm has three bond issues outstanding...

Question 3

Given the following information, what is JHM Corporation's WACC?

Accepted Answer

The answer of Given the following information, what is JHM...

Question 4

Anthony's Anchovies, Inc. sold a 20-year bond issue two years ago. The bond has a 5.35% annual coupon and a $1,000 face value. If the current market price of the bond is $751.64 and the tax rate
Is 34%, what is the after-tax cost of debt?

Accepted Answer

The answer of Anthony's Anchovies, Inc. sold a 20-year bond...

Question 5

The common stock of Tommy's Tools sells for $27.50. The ﬁrm's beta = 1.2, the risk-free rate is 4%, and the market risk premium is 8%. Next year's dividend is expected to be $1.50. Assuming that
Dividend growth is expected to remain constant for Tommy's over the foreseeable future, what is
The ﬁrm's anticipated dividend growth rate?

Accepted Answer

The answer of The common stock of Tommy's Tools sells...

Question 6

Cruiseliners, Inc. has 230,000 shares of common stock outstanding at a market price of $40 a share. Next quarter, Cruiseliners' is expected to pay an annual dividend in the amount of $1.80 per
Share. The dividend growth rate is 3 percent. Cruiseliners' also has 8,000 bonds outstanding with a
Face value of $1,000 per bond. The bonds carry a 9 percent coupon, pay interest annually, and
Mature in 5.093 years. The bonds are selling at 102 percent of face value. The company's tax rate is
35 percent. What is Cruiseliners' weighted average cost of capital?

Accepted Answer

The answer of Cruiseliners, Inc. has 230,000 shares of common...

Question 7

The Pulp Company has a 9-year bond outstanding with a 7.5 percent coupon. Coupons are paid semi-annually. The face amount of the bond is $1,000. This bond is currently selling for 96 percent
Of its face value. What is the company's pre-tax cost of debt?

Accepted Answer

The answer of The Pulp Company has a 9-year bond...

Question 8

Blackwater Adventures has a bond issue outstanding that matures in sixteen years. The bonds pay interest semi-annually. Currently, the bonds are quoted at 103 percent of face value and carry a 9
Percent coupon. The ﬁrm's tax rate is 34 percent. What is the ﬁrm's after-tax cost of debt?

Accepted Answer

To find the after-tax cost of debt, we need to calculate the yield to maturity (YTM) after taking into account the tax savings from the interest payments.

First, we need to find the current market value of the bonds:
Market value = 103% * face value = 1.03 * $1,000 = $1,030

Next, we can use a financial calculator or spreadsheet program to solve for the YTM. Using a financial calculator:
N = 32 (16 years * 2 semi-annual periods per year)
PV = -1,030
PMT = 45 (9% * $1,000 / 2)
FV = 1,000
Solve for I/Y = 4.76%

This is the before-tax cost of debt. To find the after-tax cost of debt, we need to adjust for the tax savings from the interest payments:
After-tax cost of debt = before-tax cost * (1 - tax rate)
= 4.76% * (1 - 0.34)
= 3.14%

Therefore, the answer is B) 5.71 percent (rounded up to two decimal places).

Question 9

Jackson & Jackson (J&J) has a $1 million bond issue outstanding that is selling at 101.3 percent of face value. J&J also has 25,000 shares of preferred stock and 450,000 shares of common stock
Outstanding. The preferred stock has a market price of $36 a share compared to a price of $24 a
Share for the common stock. What is the weight of the debt as it relates to the ﬁrm's weighted
Average cost of capital?

Accepted Answer

To calculate the weight of the debt, we need to first calculate the total market value of J&J's capital structure:
Total market value = (number of preferred shares x price per preferred share) + (number of common shares x price per common share) + (face value of bonds x bond selling price)
Total market value = (25,000 x $36) + (450,000 x $24) + ($1,000,000 x 1.013)
Total market value = $20,925,000
Weight of debt = (face value of bonds x bond selling price) / total market value
Weight of debt = ($1,000,000 x 1.013) / $20,925,000
Weight of debt = 0.048
Weight of debt = 4.8%
Therefore, the weight of debt as it relates to J&J's weighted average cost of capital is 7.97% (since we are only considering debt and equity, we can assume the weight of equity is 100% - 4.8% = 95.2%).

Question 10

Kottinger's Kamp Supplies is considering an investment in new manufacturing equipment. The equipment costs $220,000 and will provide annual after-tax inﬂows of $50,000 at the end of each
Of the next seven years. The ﬁrm's market value debt/equity ratio is 25%, its cost of equity is 14%,
And its pre-tax cost of debt is 7%. The ﬂotation costs of debt and equity are 3% and 9%,
Respectively. The ﬁrm's combined marginal federal and provincial tax rate is 40%. Assume the
Project is of approximately the same risk as the ﬁrm's existing operations.
What is the weighted average ﬂotation cost for Kottinger's?

Accepted Answer

The weighted average flotation cost is calculated using the formula: (E/V * Fe) + (D/V * Fd), where E/V is the equity portion, D/V is the debt portion, Fe is the flotation cost of equity, and Fd is the flotation cost of debt. Given the debt/equity ratio of 25%, the equity portion is 80% and the debt portion is 20%. Thus, the calculation is (0.8 * 9%) + (0.2 * 3%) = 7.8%.

Question 11

Hometown Industries has paid annual dividends of $2.00, $2.08, $2.15, and $2.25 per share over the last four years, respectively. The stock is currently selling for $46.80 a share. What is this ﬁrm's
Cost of equity?

Accepted Answer

The answer of Hometown Industries has paid annual dividends of...

Question 12

Suppose that Topstone Industries has a cost of equity of 14% and a cost of debt of 9%. If the target debt/equity ratio is 75%, and the tax rate is 34%, what is Topstone's weighted average cost of
Capital (WACC)?

Accepted Answer

First, we need to calculate the weight of equity and debt based on the target debt/equity ratio of 75%.

Equity weight = 1 / (1 + debt/equity) = 1 / (1 + 0.75) = 0.5714 
Debt weight = 0.75 / (1 + debt/equity) = 0.75 / (1 + 0.75) = 0.4286

Next, we can use the following formula to calculate the WACC:

WACC = (cost of equity x equity weight) + (cost of debt x debt weight x (1 - tax rate))

WACC = (0.14 x 0.5714) + (0.09 x 0.4286 x (1 - 0.34)) = 0.0804 or 8.04%

Therefore, the best choice is D, 10.5%.

Question 13

Shirley's and Son have a debt-equity ratio of .60 and a tax rate of 35 percent. The ﬁrm does not issue preferred stock. The cost of equity is 10 percent and the pre-tax cost of debt is 8 percent.
What is Shirley's weighted average cost of capital?

Accepted Answer

The answer of Shirley's and Son have a debt-equity ratio...

Question 14

The Warren Corporation has an overall cost of equity of 9.5 percent and a beta of 1.3. The ﬁrm is ﬁnanced 100 percent with common stock. The risk-free rate of return is 3 percent. What is an
Appropriate cost of capital for a division within the ﬁrm that has an estimated beta of .85?

Accepted Answer

The answer of The Warren Corporation has an overall cost...

Question 15

The Woodsburg Co. maintains a debt-equity ratio of .60 and has a tax rate of 35 percent. The ﬁrm does not issue preferred stock. The ﬁrm's pre-tax cost of debt is 8.75 percent. Woodsburg Co. has
20,000 shares of stock outstanding with a beta of .9 and a market price of $30. The current market
Risk premium is 7 percent and the current risk-free rate is 3 percent. Last month, Woodsburg Co.
Issued an annual dividend in the amount of $1.25 per share. Dividends are expected to grow at 2
Percent indeﬁnitely. Using an average expected cost of equity, what is Woodsburg's weighted
Average cost of capital?

Accepted Answer

The answer of The Woodsburg Co. maintains a debt-equity ratio...

Question 16

Great Sound Music, Inc. has 20,000 shares of common stock outstanding at a market price of $26 a share. This stock was originally issued at $19 per share. The ﬁrm also has a bond issue outstanding
With a total face value of $300,000 which is selling for 97 percent of face value. The cost of equity
Is 10 percent while the after-tax cost of debt is 5 percent. The ﬁrm has a beta of 1.2 and a tax rate of
35 percent. What is Great Sound's weighted average cost of capital?

Accepted Answer

The answer of Great Sound Music, Inc. has 20,000 shares...

Question 17

Swiss Cheeses, Inc. has paid annual dividends of $1.00, $1.04, $1.09, and $1.15 per share over the last four years, respectively. The stock is currently selling for $42 a share. What is this ﬁrm's cost of
Equity?

Accepted Answer

The answer of Swiss Cheeses, Inc. has paid annual dividends...

Question 18

Nexum Inc. has a target debt-equity ratio of 1.25. Its WACC is 9.2%, and the tax rate is 35%. If Nexum's cost of equity is 14%, what is its pre-tax cost of debt?

Accepted Answer

We can use the formula for WACC to solve for the pre-tax cost of debt:

WACC = (E/V) * Re + (D/V) * Rd * (1 - T)

Where:
E/V = percentage of equity in the capital structure
D/V = percentage of debt in the capital structure
Re = cost of equity
Rd = pre-tax cost of debt
T = tax rate

We are given that the target debt-equity ratio is 1.25, which means D/V = 1.25 / (1 + 1.25) = 0.44. Therefore, E/V = 1 - D/V = 0.56.

Plugging in the given values, we get:

0.092 = (0.56 * 0.14) + (0.44 * Rd * 0.65)

Solving for Rd, we get:

Rd = (0.092 - 0.0784) / (0.286) = 0.0825 or 8.25%

Therefore, the correct answer is C.

Question 19

A ﬁrm ﬁnances its projects with 45% common stock, 15% preferred stock, and 40% debt. The ﬁrm has a 34% marginal tax rate. The cost of equity is 9%, the cost of preferred is 8%, and the cost of
Debt is 7%. What is the WACC?

Accepted Answer

The WACC is calculated as: WACC = (E/V * Re) + (P/V * Rp) + (D/V * Rd * (1-Tc)), where E, P, and D are the proportions of equity, preferred stock, and debt, respectively, and Re, Rp, and Rd are their respective costs. Tc is the tax rate. Substituting the given values: WACC = (0.45 * 0.09) + (0.15 * 0.08) + (0.40 * 0.07 * (1-0.34)) = 0.0405 + 0.012 + 0.01848 = 0.0710 or 7.10%.

Question 20

The Adept Co. has paid annual dividends of $.80, $.92, $.98, $1.04, and $1.09 over the past ﬁve years respectively. What is the average dividend growth rate?

Accepted Answer

The answer of The Adept Co. has paid annual dividends...

Quiz 14: Cost of Capital

The long-term debt of Topstone Industries is currently selling for 104.50% of its face value. The issue matures in 10 years and pays an annual coupon of 8%. What is the cost of debt?

A ﬁrm has three bond issues outstanding as shown below. Based on this information what is the weighted average cost of debt?

Given the following information, what is JHM Corporation's WACC?

Anthony's Anchovies, Inc. sold a 20-year bond issue two years ago. The bond has a 5.35% annual coupon and a $1,000 face value. If the current market price of the bond is $751.64 and the tax rate Is 34%, what is the after-tax cost of debt?

The Pulp Company has a 9-year bond outstanding with a 7.5 percent coupon. Coupons are paid semi-annually. The face amount of the bond is $1,000. This bond is currently selling for 96 percent Of its face value. What is the company's pre-tax cost of debt?

Blackwater Adventures has a bond issue outstanding that matures in sixteen years. The bonds pay interest semi-annually. Currently, the bonds are quoted at 103 percent of face value and carry a 9 Percent coupon. The ﬁrm's tax rate is 34 percent. What is the ﬁrm's after-tax cost of debt?

Hometown Industries has paid annual dividends of $2.00, $2.08, $2.15, and $2.25 per share over the last four years, respectively. The stock is currently selling for $46.80 a share. What is this ﬁrm's Cost of equity?

Suppose that Topstone Industries has a cost of equity of 14% and a cost of debt of 9%. If the target debt/equity ratio is 75%, and the tax rate is 34%, what is Topstone's weighted average cost of Capital (WACC) ?

Shirley's and Son have a debt-equity ratio of .60 and a tax rate of 35 percent. The ﬁrm does not issue preferred stock. The cost of equity is 10 percent and the pre-tax cost of debt is 8 percent. What is Shirley's weighted average cost of capital?

The Warren Corporation has an overall cost of equity of 9.5 percent and a beta of 1.3. The ﬁrm is ﬁnanced 100 percent with common stock. The risk-free rate of return is 3 percent. What is an Appropriate cost of capital for a division within the ﬁrm that has an estimated beta of .85?

Swiss Cheeses, Inc. has paid annual dividends of $1.00, $1.04, $1.09, and $1.15 per share over the last four years, respectively. The stock is currently selling for $42 a share. What is this ﬁrm's cost of Equity?

Nexum Inc. has a target debt-equity ratio of 1.25. Its WACC is 9.2%, and the tax rate is 35%. If Nexum's cost of equity is 14%, what is its pre-tax cost of debt?

A ﬁrm ﬁnances its projects with 45% common stock, 15% preferred stock, and 40% debt. The ﬁrm has a 34% marginal tax rate. The cost of equity is 9%, the cost of preferred is 8%, and the cost of Debt is 7%. What is the WACC?

The Adept Co. has paid annual dividends of $.80, $.92, $.98, $1.04, and $1.09 over the past ﬁve years respectively. What is the average dividend growth rate?