Scribd Logo
Upload

Welcome to Scribd!

  • 1 views

    Student - Cost of Capital & Capital Structure

    Uploaded by

    Liễu Nguyễn Thúy

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd

    Student - Cost of Capital & Capital Structure

    Uploaded by

    Liễu Nguyễn Thúy
    1 views2 pages

    Original Title

    Student - cost of capital & capital structure

    Copyright

    © © All Rights Reserved

    Available Formats

    DOCX, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    1 views2 pages

    Student - Cost of Capital & Capital Structure

    Uploaded by

    Liễu Nguyễn Thúy

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 2

    Cost of capital

    (1) Calculate the after-tax cost of debt under each of the following conditions:
    a. rd of 13%, tax rate of 0%
    b. rd of 13%, tax rate of 20%
    c. rd of 13%, tax rate of 35%
    (2) LL Incorporated’s currently outstanding 11% coupon bonds have a yield to maturity of 8%.
    LL believes it could issue new bonds at par that would provide a similar yield to maturity. If its
    marginal tax rate is 35%, what is LL’s after-tax cost of debt?
    (3) Duggins Veterinary Supplies can issue perpetual preferred stock at a price of $50 a share with
    an annual dividend of $4.50 a share. Ignoring flotation costs, what is the company’s cost of
    preferred stock, rps?
    (4) Burnwood Tech plans to issue some $60 par preferred stock with a 6% dividend. A similar
    stock is selling on the market for $70. Burnwood must pay flotation costs of 5% of the issue
    price. What is the cost of the preferred stock?
    (5) Summerdahl Resort’s common stock is currently trading at $36 a share. The stock is to pay a
    dividend of $3.00 a share at the end of the year (D1 = $3.00), and the dividend is expected to
    grow at a constant rate of 5% a year. What is its cost of common equity?
    (6) Booher Book Stores has a beta of 0.8. The yield on a 3-month T-bill is 4%, and the yield on a
    10-year T-bond is 6%. The market risk premium is 5.5%, and the return on an average stock in
    the market last year was 15%. What is the estimated cost of common equity using the CAPM?
    (7) Shi Importers’s balance sheet shows $300 million in debt, $50 million in preferred stock, and
    $250 million in total common equity. Shi’s tax rate is 40%, rd = 6%, rps = 5.8%, and rs = 12%.
    If Shi has a target capital structure of 30% debt, 5% preferred stock, and 65% common stock,
    what is its WACC?
    (8) David Ortiz Motors has a target capital structure of 40% debt and 60% equity. The yield to
    maturity on the company’s outstanding bonds is 9%, and the company’s tax rate is 40%. Ortiz’s
    CFO has calculated the company’s WACC as 9.96%. What is the company’s cost of
    equity capital?
    Capital structure
    1. Shapland Inc. has fixed operating costs of $500,000 and variable costs of $50 per unit. If it
    sells the product for $75 per unit, what is the break-even quantity?
    (2) Counts Accounting has a beta of 1.15. The tax rate is 40%, and Counts is financed with 20%
    debt. What is Counts’s unlevered beta?
    (3) Ethier Enterprise has an unlevered beta of 1.0. Ethier is financed with 50% debt and has a
    levered beta of 1.6. If the risk-free rate is 5.5% and the market risk premium is 6%, how much is
    the additional premium that Ethier’s shareholders require to be compensated for financial risk?
    (4) Nichols Corporation’s value of operations is equal to $500 million after a recapitalization (the
    firm had no debt before the recap). It raised $200 million in new debt and used this to buy back
    stock. Nichols had no short-term investments before or after the recap. After the recap, wd =
    40%. What is S (the value of equity after the recap)?
    (5) Lee Manufacturing’s value of operations is equal to $900 million after a recapitalization (the
    firm had no debt before the recap). Lee raised $300 million in new debt and used this to buy back
    stock. Lee had no short-term investments before or after the recap. After the recap, wd = 1/3. The
    firm had 30 million shares before the recap. What is P (the stock price after the recap)?
    (6) Dye Trucking raised $150 million in new debt and used this to buy back stock. After the
    recap, Dye’s stock price is $7.50. If Dye had 60 million shares of stock before the recap, how
    many shares does it have after the recap?

    You might also like