FNAN 522 MODULE 3 QUESTIONS AND ANSWERS
A company has a risk free rate of 3% and a risk premium of 6%. Its tax rate is 35%.
What is the company's cost of debt? - Answers -5.85%
A company is thinking of issuing more common stock. Its stock's current market price is
$50 a share with an expected dividend annual one year from today of $3 a share.
Dividends are expected to grow 5% per year and there are no flotation costs. What is
the company cost of new common stock? - Answers -11.00%
A company has retained earnings of $1.5 million and net income of $8 million. What is
the retention ratio (expressed as a decimal)? - Answers -0.1875
A company makes an initial $10,000 investment in a project. This project is projected to
earn $8000 in year one, $10,000 in year 2, $12,000 in year 3, and $20,000 in year 4. If
the WACC is 5%, what is the project's present value? - Answers -$33,509
MV Corporation has debt with market value of $100 million, common equity with a book
value of $104 million, and preferred stock worth $17 million outstanding. Its common
equity trades at $55 per share, and the firm has 6.1 million shares outstanding. What
weights should MV Corporation use in its WACC? - Answers -Weight for debt: 22.08%;
weight for preferred stock: 3.75%; weight for common equity: 74.17%
Book Co. has 1.9 million shares of common equity with a par (book) value of $1.05,
retained earnings of $30.4 million, and its shares have a market value of $51.61 per
share. It also has debt with a par value of $21.5 million that is trading at 101% of par.
What is the market value of its equity? What is the market value of its debt? - Answers -
MV of equity: $98.06 million; MV of debt: $21.72 million
Laurel, Inc., has debt outstanding with a coupon rate of 5.9% and a yield to maturity of
6.9%. Its tax rate is 35%. What is Laurel's effective (after-tax) cost of debt?NOTE:
Assume that the debt has annual coupons. - Answers -4.49%
Dewyco has preferred stock trading at $49 per share. The next preferred dividend of $5
is due in one year. What is Dewyco's cost of capital for preferred stock? - Answers -
10.2%
Steady Company's stock has a beta of 0.25. If the risk-free rate is 5.9% and the market
risk premium is 7.2%, what is an estimate of Steady Company's cost of equity? -
Answers -7.7%
CoffeeCarts has a cost of equity of 15.4%, has an effective (aka after-tax) cost of debt
of 3.5%, and is financed 70% with equity and 30% with debt. What is this firm's WACC?
- Answers -11.8%
A company has a risk free rate of 3% and a risk premium of 6%. Its tax rate is 35%.
What is the company's cost of debt? - Answers -5.85%
A company is thinking of issuing more common stock. Its stock's current market price is
$50 a share with an expected dividend annual one year from today of $3 a share.
Dividends are expected to grow 5% per year and there are no flotation costs. What is
the company cost of new common stock? - Answers -11.00%
A company has retained earnings of $1.5 million and net income of $8 million. What is
the retention ratio (expressed as a decimal)? - Answers -0.1875
A company makes an initial $10,000 investment in a project. This project is projected to
earn $8000 in year one, $10,000 in year 2, $12,000 in year 3, and $20,000 in year 4. If
the WACC is 5%, what is the project's present value? - Answers -$33,509
MV Corporation has debt with market value of $100 million, common equity with a book
value of $104 million, and preferred stock worth $17 million outstanding. Its common
equity trades at $55 per share, and the firm has 6.1 million shares outstanding. What
weights should MV Corporation use in its WACC? - Answers -Weight for debt: 22.08%;
weight for preferred stock: 3.75%; weight for common equity: 74.17%
Book Co. has 1.9 million shares of common equity with a par (book) value of $1.05,
retained earnings of $30.4 million, and its shares have a market value of $51.61 per
share. It also has debt with a par value of $21.5 million that is trading at 101% of par.
What is the market value of its equity? What is the market value of its debt? - Answers -
MV of equity: $98.06 million; MV of debt: $21.72 million
Laurel, Inc., has debt outstanding with a coupon rate of 5.9% and a yield to maturity of
6.9%. Its tax rate is 35%. What is Laurel's effective (after-tax) cost of debt?NOTE:
Assume that the debt has annual coupons. - Answers -4.49%
Dewyco has preferred stock trading at $49 per share. The next preferred dividend of $5
is due in one year. What is Dewyco's cost of capital for preferred stock? - Answers -
10.2%
Steady Company's stock has a beta of 0.25. If the risk-free rate is 5.9% and the market
risk premium is 7.2%, what is an estimate of Steady Company's cost of equity? -
Answers -7.7%
CoffeeCarts has a cost of equity of 15.4%, has an effective (aka after-tax) cost of debt
of 3.5%, and is financed 70% with equity and 30% with debt. What is this firm's WACC?
- Answers -11.8%
