PRIN.OF CORPORATE FINANCE
PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 9, Problem 8PS

WACC Binomial Tree Farm’s financing includes $5 million of bank loans. Its common equity is shown in Binomial’s Annual Report at $6.67 million. It has 500,000 shares of common stock outstanding, which trade on the Wichita Stock Exchange at $18 per share. What debt ratio should Binomial use to calculate its WACC or asset beta? Explain.

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a)Assume that the following data is extracted from the financial statements of Richy-Rich bank: equity is $350 million, interest expense is $115 million, provision for loan loss (P) is $35 million, noninterest income is $30 million, noninterest expense is $50 million and a tax rate is 33%. What is the minimum total interest income required to give a return on equity (ROE) of 20%? Show workings when necessary.    b) Be-smart Bank reported an equity multipler ratio of 6.5 at the end of year 2021. If the bank’s total debt at the end of year 2021 was $5 million, how much of its assets were financed with equity? Show calculations when necessary.    c) What are the main sources of funding for commercial banks? Using bullet points, classify these sources and briefly describe each category.
One third of company X's asset purchases were financed by taking out a loan from the bank. The remainder of the asset purchases were financed by selling shares of company X's common stock. What is the financial leverage (ratio) that describes this situation? Round your answer to two decimal places if necessary. Report any percentages as decimals (ie: write .05 instead of 5%).   The answer is not 0.5 or 0.33
Binomial Tree Farm’s financing includes $5.70 million of bank loans and $6.70 million book (face) value of 10-year bonds, which are selling at 80% of par value. Its common equity is shown in Binomial’s Annual Report at $7.37. It has 570,000 shares of common stock outstanding which trade on the Wichita Stock Exchange at $21 per share. What debt ratio should Binomial use to calculate its WACC? (Round your answer to 2 decimal places.)
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What is WACC-Weighted average cost of capital; Author: Learn to invest;https://www.youtube.com/watch?v=0inqw9cCJnM;License: Standard YouTube License, CC-BY