11 Jan If the firm uses its

1.

Diddy Corp. stock has a beta of 1.2, the current risk-free rate is 3 percent, and the expected return on the market is 14.50 percent.

What is Diddy’s cost of equity?(Round your answer to 2 decimal places.)

2.

JaiLai Cos. stock has a beta of 0.8, the current risk-free rate is 6.7 percent, and the expected return on the market is 12 percent.

What is JaiLai’s cost of equity?(Round your answer to 2 decimal places.)

Hint #1

3.

Oberon, Inc., has a $35 million (face value) 8-year bond issue selling for 98 percent of par that pays an annual coupon of 8.35 percent.

What would be Oberon’s before-tax component cost of debt?(Round your answer to 2 decimal places.)

4.

KatyDid Clothes has a $130 million (face value) 25-year bond issue selling for 104 percent of par that carries a coupon rate of 10 percent, paid semiannually.

What would be KatyDid’s before-tax component cost of debt?(Round your answer to 2 decimal places.)

5.

Suppose that LilyMac Photography expects EBIT to be approximately $230,000 per year for the foreseeable future, and that it has 1,000 10-year, 9 percent annual coupon bonds outstanding. (Use Table 11.1)

What would the appropriate tax rate be for use in the calculation of the debt component of LilyMac’s WACC?

6.

PDQ, Inc., expects EBIT to be approximately $13.2 million per year for the foreseeable future, and it has 100,000 20-year, 6 percent annual coupon bonds outstanding. (Use Table 11.1)

What would the appropriate tax rate be for use in the calculation of the debt component of PDQ’s WACC?(Round your answer to 2 decimal places.)

7.

ILK has preferred stock selling for 95 percent of par that pays a 9 percent annual coupon.

What would be ILK’s component cost of preferred stock?(Round your answer to 2 decimal places.)

8.

Marme, Inc., has preferred stock selling for 98 percent of par that pays a 10 percent annual coupon.

What would be Marme’s component cost of preferred stock?(Round your answer to 2 decimal places.)

9.

FarCry Industries, a maker of telecommunications equipment, has 5 million shares of common stock outstanding, 2 million shares of preferred stock outstanding, and 20,000 bonds. Suppose the common shares are selling for $29 per share, the preferred shares are selling for $15.50 per share, and the bonds are selling for 98 percent of par.

What would be the weight used for equity in the computation of FarCry’s WACC?(Round your answer to 2 decimal places.)

10.

OMG Inc. has 4 million shares of common stock outstanding, 3 million shares of preferred stock outstanding, and 5,000 bonds. Suppose the common shares sell for $19 per share, the preferred shares sell for $18 per share, and the bonds sell for 108 percent of par.

What weight should you use for preferred stock in the computation of OMG’s WACC?(Round your answer to 2 decimal places.)

11.

Suppose that JB Cos. has a capital structure of 78 percent equity, 22 percent debt, and that its before-tax cost of debt is 10 percent while its cost of equity is 14 percent. Assume the appropriate weighted-average tax rate is 25 percent.

What will be JB’s WACC?(Round your answer to 2 decimal places.)

12.

Johnny Cake Ltd. has 10 million shares of stock outstanding selling at $21 per share and an issue of $50 million in 10 percent annual coupon bonds with a maturity of 16 years, selling at 91.0 percent of par. Assume Johnny Cake’s weighted-average tax rate is 34 percent, its next dividend is expected to be $3 per share, and all future dividends are expected to grow at 5 percent per year, indefinitely.

What is its WACC? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

13.

BetterPie Industries has 6 million shares of common stock outstanding, 4 million shares of preferred stock outstanding, and 15,000 bonds. Assume the common shares are selling for $49 per share, the preferred shares are selling for $26.50 per share, and the bonds are selling for 99 percent of par.

What would be the weights used in the calculation of BetterPie’s WACC?(Do not round intermediate calculations. Round your final answer to 2 decimal places.)

14.

Suppose that Brown-Murphies’ common shares sell for $21.00 per share, that the firm is expected to set their next annual dividend at $0.63 per share, and that all future dividends are expected to grow by 4 percent per year, indefinitely. Assume Brown-Murphies faces a flotation cost of 14 percent on new equity issues.

What will be the flotation-adjusted cost of equity?(Round your answer to 2 decimal places.)

15.

Suppose that Brown-Murphies’ common shares sell for $21.00 per share, that the firm is expected to set their next annual dividend at $0.63 per share, and that all future dividends are expected to grow by 4 percent per year, indefinitely. Assume Brown-Murphies faces a flotation cost of 14 percent on new equity issues.

What will be the flotation-adjusted cost of equity?(Round your answer to 2 decimal places.)

16.

A firm is considering a project that will generate perpetual after-tax cash flows of $16,000 per year beginning next year. The project has the same risk as the firm’s overall operations and must be financed externally. Equity flotation costs 14 percent and debt issues cost 6 percent on an after-tax basis. The firm’s D/E ratio is 0.6.

What is the most the firm can pay for the project and still earn its required return?(Do not round intermediate calculations. Round your final answer to the nearest whole dollar.)

17.

An all-equity firm is considering the projects shown below. The T-bill rate is 3 percent and the market risk premium is 6 percent.

Project

Expected Return

Beta

A

5

%

0.3

B

16

%

1.1

C

10

%

1.3

D

13

%

1.5

Calculate the project-specific benchmarks for each project.(Round your answers to 2 decimal places.)

If the firm uses its current WACC of 8 percent to evaluate these projects, which project, will be incorrectly rejected?

18.

Suppose your firm has decided to use a divisional WACC approach to analyze projects. The firm currently has four divisions, A through D, with average betas for each division of 0.8, 1.2, 1.4, and 1.6, respectively. Assume all current and future projects will be financed with 20 percent debt and 80 percent equity, the current cost of equity (based on an average firm beta of 1.1 and a current risk-free rate of 7 percent) is 11 percent and the after-tax yield on the company’s bonds is 12 percent.

What will the WACCs be for each division?(Do not round intermediate calculations and round your final answers to 2 decimal places.)