Expert Answer:Average Cost of Capital Accounting Balance Finance

  

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Q1 If a company’s weighted average cost of capital is less than the required return on equity, then the
firm
has debt in its capital structure.
is perceived to be safe.
must have preferred stock in its capital structure.
is financed with more than 50% debt.
Q2 The finance balance sheet is
the same as the accounting balance sheet, but it is based on market values.
the same as the accounting balance sheet, but it does not have to balance.
based on cash rather than accrual accounting.
the same as the accounting balance sheet, but it is based on historical values.
Q3 Blossom Tire Co. just paid an annual dividend of $1.20 on its common shares. If Blossom is
expected to increase its annual dividend by 2.10 percent per year into the foreseeable future and the
current price of Blossom’s common shares is $11.00, what is the cost of common stock for
Blossom? (Round intermediate calculations to 4 decimal places, e.g. 0.1555 and final answer
to 2 decimal places, e.g. 15.25%.)
Cost of common stock
%
Q4 You know that the return of Sheridan Cyclicals common shares is 1.7 times as sensitive to
macroeconomic information as the return of the market. If the risk-free rate of return is 3.50 percent
and market risk premium is 5.71 percent, what is Sheridan Cyclicals’ cost of common equity
capital? (Round intermediate calculation to 5 decimal places, e.g. 1.25140 and final answer
to 2 decimal places, e.g. 15.25%.)
Cost of common equity capital
%
Q5 Pharoah Luxury Liners has preferred shares outstanding that pay an annual dividend equal to $18
per year. If the current price of Pharoah preferred shares is $120.00, what is the after-tax cost of
preferred stock for Pharoah?
After-tax cost of preferred stock
Q6
%
Cullumber Ltd. has issued bonds that never require the principal amount to be repaid to investors.
Correspondingly, Cullumber must make interest payments into the infinite future. If the
bondholders receive annual payments of $76 and the current price of the bonds is $950.00.
What is the pre-tax cost of this debt? (Round answer to 2 decimal places, e.g. 15.25%.)
Pre-tax cost of debt
%
What is the after-tax cost of this debt for Cullumber if the firm is in the 40 percent marginal tax
rate? (Round intermediate calculations to 4 decimal places, e.g. 1.2514 and final answer
to 2 decimal places, e.g. 15.25%.)
After-tax cost of debt
%
Q7
You are analyzing the cost of debt for a firm. You know that the firm’s 14-year maturity, 8.6
percent coupon bonds are selling at a price of $761.14. The bonds pay interest semiannually. If
these bonds are the only debt outstanding for the firm, answer the following questions.
What is the current YTM of the bonds? (Round final answer to 2 decimal places, e.g.
15.25%.)
Current YTM for the bonds
%
What is the after-tax cost of debt for this firm if it has a 30 percent marginal and average tax
rate? (Round final answer to 2 decimal places, e.g. 15.25%.)
After-tax cost of debt
%
Q8
You are analyzing the after-tax cost of debt for a firm. You know that the firm’s 12-year maturity,
18.00 percent semiannual coupon bonds are selling at a price of $1,551.95. These bonds are the
only debt outstanding for the firm.
What is the current YTM of the bonds? (Round final answer to 2 decimal places, e.g.
15.25%.)
YTM
%
What is the after-tax cost of debt for this firm if it has a marginal tax rate of 34 percent? (Round
intermediate calculations to 4 decimal places, e.g. 1.2514 and final answer to 2 decimal
places, e.g. 15.25%.)
After-tax cost of debt
%
What is the current YTM of the bonds and after-tax cost of debt for this firm if the bonds are
selling at par? (Round intermediate calculations to 4 decimal places, e.g. 1.2514 and final
answers to 2 decimal places, e.g. 15.25%.)
YTM
After-tax cost of debt
%
%
Q9 Pharoah Co. has a capital structure, based on current market values, that consists of 35 percent
debt, 9 percent preferred stock, and 56 percent common stock. If the returns required by investors
are 8 percent, 10 percent, and 15 percent for the debt, preferred stock, and common stock,
respectively, what is Pharoah’s after-tax WACC? Assume that the firm’s marginal tax rate is 40
percent. (Round final answer to 2 decimal places, e.g. 15.25%.)
After tax WACC
%
Q10 The Wildhorse Products Co. currently has debt with a market value of $275 million outstanding.
The debt consists of 9 percent coupon bonds (semiannual coupon payments) which have a maturity of
15 years and are currently priced at $1,445.45 per bond. The firm also has an issue of 2 million
preferred shares outstanding with a market price of $19 per share. The preferred shares pay an
annual dividend of $1.20. Wildhorse also has 14 million shares of common stock outstanding with a
price of $20.00 per share. The firm is expected to pay a $2.20 common dividend one year from today,
and that dividend is expected to increase by 4 percent per year forever. If Wildhorse is subject to a 40
percent marginal tax rate, then what is the firm’s weighted average cost of capital? Excel Below
Calculate the weights for debt, common equity, and preferred equity. (Round intermediate
calculations and final answers to 4 decimal places, e.g. 1.2514.)
Debt
Preferred equity
Common equity
Calculate the cost of debt. (Round intermediate calculations to 4 decimal places, e.g.
1.2514 and final answer to 2 decimal places, e.g. 15.25%.)
Cost of debt
%
Calculate the cost of preferred equity. (Round intermediate calculations to 4 decimal
places, e.g. 1.2514 and final answer to 2 decimal places, e.g. 15.25%.)
Cost of preferred equity
%
Calculate the cost of common equity. (Round intermediate calculations to 4 decimal places,
e.g. 1.2514 and final answer to 0 decimal places, e.g. 15%.)
Cost of common equity
%
What is the firm’s weighted average cost of capital? (Round intermediate calculations to 4
decimal places, e.g. 1.2514 and final answer to 2 decimal places, e.g. 15.25%.)
WACC
%

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