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ADMS 3530 (82)
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Administrative Studies
ADMS 3530
Lois King

Sample WACC questions Semih Yildirim ADMS 3530 ------------------------------------------------------------------------------------------------ 1. Elway Mining Corporation has 8 million shares of common stock outstanding, 1 million shares of 6 percent preferred outstanding, and 100,000 9 percent semiannual coupon bonds outstanding, par value $1,000 each. The common stock currently sells for $35 per share and has a beta of 1.0, the preferred stock currently sells for $60 per share, and the bonds have 15 years to maturity and sell for 89 percent of par. The market risk premium is 8 percent, T-bills are yielding 5 percent, and the firm’s tax rate is 34 percent. a. What is the firm’s market value capital structure? b. If the firm 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? ------------------------------------------------------------------------------------------------ 2. True North, Inc. is considering a project that will result in initial aftertax cash savings of $6 million at the end of the first year, and these savings will grow at a rate of 5 percent per year indefinitely. The firm has a target debt/equit
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