Directions: You MUST show ALL of your work to receive credit on the problems. There will be significant point reductions if you do not show your work. All calculations should be completed to at least 2 decimal places.
1) What is a firm's weighted-average cost of capital if the stock has a beta of 1.45, Treasury bills yield 5%, and the market portfolio offers an expected return of 14%? In addition to equity, the firm finances 30% of its assets with debt that has a yield to maturity of 9%. The firm is in the 35% marginal tax bracket.
2) Compute the weighted-average cost of capital for a firm with the following sources of funds and corresponding required rates of return: $5 million common stock at 16%, $500,000 preferred stock at 10%, and $3 million debt at 9%. All amounts are listed at market values and the firm's tax rate is 35%.
3) Calculate a firm's required rates of return for both of its equity components: Its common stock sells for $50 per share and will pay a $6 dividend next year which is expected to grow at a constant 5% rate. Its preferred stock sells for $22.50 per share and pays $1.80 in dividends. What accounts for the difference in returns, given that these are both forms of equity?
4) Why can faulty decisions be made when all capital budgeting proposals are evaluated at the firm's current weighted average cost of capital?
5)
Here is some information about Stokenchurch Inc.:
Beta of common stock = 1.2
Treasury bill rate = 4%
Market risk premium = 7.5%
Yield to maturity on long- term debt = 6%
Book value of equity = $ 440 million
Market value of equity = $ 880 million
Long- term debt outstanding = $ 880 million
Corporate tax rate = 35%
What is the companyâs WACC?
Directions: You MUST show ALL of your work to receive credit on the problems. There will be significant point reductions if you do not show your work. All calculations should be completed to at least 2 decimal places.
1) What is a firm's weighted-average cost of capital if the stock has a beta of 1.45, Treasury bills yield 5%, and the market portfolio offers an expected return of 14%? In addition to equity, the firm finances 30% of its assets with debt that has a yield to maturity of 9%. The firm is in the 35% marginal tax bracket.
2) Compute the weighted-average cost of capital for a firm with the following sources of funds and corresponding required rates of return: $5 million common stock at 16%, $500,000 preferred stock at 10%, and $3 million debt at 9%. All amounts are listed at market values and the firm's tax rate is 35%.
3) Calculate a firm's required rates of return for both of its equity components: Its common stock sells for $50 per share and will pay a $6 dividend next year which is expected to grow at a constant 5% rate. Its preferred stock sells for $22.50 per share and pays $1.80 in dividends. What accounts for the difference in returns, given that these are both forms of equity?
4) Why can faulty decisions be made when all capital budgeting proposals are evaluated at the firm's current weighted average cost of capital?
5)
Here is some information about Stokenchurch Inc.:
Beta of common stock = 1.2
Treasury bill rate = 4%
Market risk premium = 7.5%
Yield to maturity on long- term debt = 6%
Book value of equity = $ 440 million
Market value of equity = $ 880 million
Long- term debt outstanding = $ 880 million
Corporate tax rate = 35%
What is the companyâs WACC?
