Chapter 14 homework

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School

Siena College *

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201

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Finance

Date

Feb 20, 2024

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docx

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Uploaded by dianaparker13

Chapter 14 homework 1) A group of individuals got together and purchased all of the outstanding shares of common stock of DL Smith, Inc. What is the return that these individuals require on this investment called? A) Dividend yield. B) Capital gains yield. C) Cost of capital. D) Cost of equity. E) Income return. 2) Textile Mills borrows money at a rate of 13.5 percent. This interest rate is referred to as the: A) Compound rate. B) Capital gains yield. C) Cost of capital. D) Current yield. E) Cost of debt. 3) The average of a firm's cost of equity and after tax cost of debt that is weighted based on the firm's capital structure is called the: A) Weighted capital gains rate. B) Structured cost of capital. C) Subjective cost of capital. D) Reward to risk ratio. E) Weighted average cost of capital.

4) Wilderness Adventures specializes in back-country tours and resort management. Travel Excitement specializes in making travel reservations and promoting vacation travel. Wilderness Adventures has an after tax cost of capital of 13 percent and Travel Excitement has an after tax cost of capital of 11 percent. Both firms are considering investing in new web sites that will enhance online reservations. The estimated net present value of such a project is estimated at $87,000 at a discount rate of 11 percent and -$12,500 at a 13 percent discount rate. Which firm or firms, if either, should accept this project? A) Travel Excitement only. B) Wilderness Adventures only. C) Both Wilderness Adventures and Travel Excitement. D) Neither Wilderness Adventures nor Travel Excitement. E) Cannot be determined without further information. 5) Black River Tours has a capital structure of 55 percent common stock, 5 percent preferred stock, and 40 percent debt. The firm has a 30 percent dividend payout ratio, a beta of 1.21, and a tax rate of 34 percent. Given this, which one of the following statements is correct? A) The after tax cost of debt will be greater than the current yield-to-maturity on the firm's outstanding bonds. B) The firm's weighted average cost of capital will remain constant as long as the firm's capital structure remains constant. C) The firm's cost of equity is unaffected by a change in the firm's tax rate. D) The cost of equity can only be estimated using the capital asset pricing model. E) The firm's cost of preferred is most likely less than the firm's actual cost of debt. 6) Chelsea Fashions is expected to pay an annual dividend of $1.10 a share next year. The market price of the stock is $21.80 and the growth rate is 4.5 percent. What is the firm's cost of equity? D1=1.10 P=21.80 g=4.5% (1.10/21.80) +4.5% A) 9.24 percent B) 9.77 percent C) 7.91 percent D) 10.54 percent E) 9.55 percent

7) Southern Home Cooking just paid its annual dividend of $.75 a share. The stock has a market price of $16.80 and a beta of 1.14. The return on the U.S. Treasury bill is 2.7 percent and the market risk premium is 7.1 percent. What is the cost of equity? Re=0.27+1.14(.071) Re=10.79% A) 10.79 percent B) 10.45 percent C) 9.98 percent D) 10.37 percent E) 10.04 percent 8) Hydro Systems has 15-year bonds outstanding with a coupon rate of 6 percent. Interest is paid annually. The face amount of each bond is $1,000. What is the company's pretax cost of debt if the bonds currently sell for $1,080? A) 5.55 percent B) 4.71 percent C) 5.36 percent D) 5.22 percent E) 4.42 percent 9) The Pet Market has $1,000 face value bonds outstanding with 18 years to maturity, a coupon rate of 9 percent, annual interest payments, and a current price of $835. What is the after tax cost of debt if the tax rate is 34 percent? A) 3.79 percent B) 7.37 percent C) 6.61 percent D) 8.28 percent E) 6.42 percent

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10) Phillips Equipment has 75,000 bonds outstanding that are selling at par. Bonds with similar characteristics are yielding 7.5 percent. The company also has 750,000 shares of $6 dividend preferred stock and 2.5 million shares of common stock outstanding. The preferred stock sells for $64 a share. The common stock has a beta of 1.21 and sells for $44 a share. The U.S. Treasury bill is yielding 2.3 percent and the return on the market is 11.2 percent. The corporate tax rate is 34 percent. What is the firm's weighted average cost of capital? WACC= We+Re+Wps+Rps+Wd*Rd*(1-T) Costs Debt: 4.95% Equity: 13.069% Preferred Stocks: 9.375% Weights: Debt: 0.3219 Equity:0.4721 Preferred Stocks:0.2060 WACC=9.69%