Please answer the following questions and show work. (Stocks, Cost of Capita & C
ID: 2726464 • Letter: P
Question
Please answer the following questions and show work. (Stocks, Cost of Capita & Capital Budgeting)
7. You were hired as a consultant to Giambono Company, whose target capital structure is 40% debt, 15% preferred, and
45% common equity. The after-tax cost of debt is 6.00%, the cost of preferred is 7.50%, and the cost of retained earnings
is 12.75%. The firm will not be issuing any new stock. What is its WACC?
a. 8.98%
b. 9.26%
c. 9.54%
d. 9.83%
8. Flaherty Electric has a capital structure that consists of 70 percent equity and 30 percent debt. The company’s long-term bonds
have a before-tax yield to maturity of 8.4 percent. The company uses the DCF approach to determine the cost of equity. Flaherty’s
common stock currently trades at $40.5 per share. The year-end dividend (D1) is expected to be $2.50 per share, and the dividend
is expected to grow forever at a constant rate of 7 percent a year. The company estimates that it will have to issue new common
stock to help fund this year’s projects. The company’s tax rate is 40 percent. What is the company’s weighted average cost of
capital, WACC?
a. 10.73%
b. 10.30%
c. 11.31%
d. 7.48%
9. Hamilton Company’s 8 percent coupon rate, quarterly payment, $1,000 par value bond, which matures in 20 years, currently
sells at a price of $686.86. The company’s tax rate is 40 percent. What is the firm’s component cost of debt for purposes of
calculating the WACC?
a. 3.05%
b. 7.32%
c. 7.36%
d. 12.20%
10. The Seattle Corporation has been presented with an investment opportunity that will yield cash flows of $30,000 per year in
Years 1 through 4, $35,000 per year in Years 5 through 9, and $40,000 in Year 10. This investment will cost the firm $150,000
today, and the firm’s cost of capital is 10 percent. Assume cash flows occur evenly during the year, 1/365th each day. What is
the payback period for this investment?
a. 5.23 years
b. 4.86 years
c. 4.00 years
d. 6.12 years
11. Coughlin Motors is considering a project with the following expected cash flows:
Project
Year Cash Flow
0 -$700 million
1 200 million
2 370 million
3 225 million
4 700 million
The project’s WACC is 10 percent. What is the project’s discounted payback?
a. 3.15 years
b. 4.09 years
c. 1.62 years
d. 3.09 years
12. Your company is choosing between the following non-repeatable, equally risky, mutually exclusive projects with the cash
flows shown below. Your cost of capital is 10 percent. How much value will your firm sacrifice if it selects the project with the
higher IRR?
k = 10%
Project S: 0 1 2 3
| | | |
-1,000 500 500 500
k = 10%
Project L: 0 1 2 3 4 5
| | | | | |
-2,000 668.76 668.76 668.76 668.76 668.76
a. $243.43
b. $291.70
c. $332.50
d. $481.15
k = 10%
Explanation / Answer
7)
WACC = Wd×Rd×(1-t)+We×Ke+Wp×Rp
W is weights of respective portfolios
R is return on respective portfolios
= 0.40×6%+0.45×12.75%+0.15×7.50%
= 9.26%