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69. Marme Inc. has preferred stock selling for 137 percent of par that pays an 11 percent
annual dividend. What would be Marme's component cost of preferred stock?
70. FarCry Industries, a maker of telecommunications equipment, has 6 million shares of
common stock outstanding, 1 million shares of preferred stock outstanding, and 10 thousand
bonds. If the common shares are selling for $27 per share, the preferred shares are selling for
$15 per share, and the bonds are selling for 119 percent of par ($1,000), what weight should you
use for debt in the computation of FarCry's WACC?
71. OMG Inc. has 4 million shares of common stock outstanding, 3 million shares of preferred
stock outstanding, and 50 thousand bonds. If the common shares are selling for $21 per share,
the preferred shares are selling for $10 per share, and the bonds are selling for 111 percent of
par ($1,000), what weight should you use for debt in the computation of OMG's WACC?
72. FarCry Industries, a maker of telecommunications equipment, has 26 million shares of
common stock outstanding, 1 million shares of preferred stock outstanding, and 10 thousand
bonds. If the common shares sell for $12 per share, the preferred shares sell for $114.50 per
share, and the bonds sell for 98 percent of par ($1,000), what weight should you use for preferred
stock in the computation of FarCry's WACC?
73. FarCry Industries, a maker of telecommunications equipment, has 26 million shares of
common stock outstanding, 1 million shares of preferred stock outstanding, and 10 thousand
bonds. If the common shares sell for $15 per share, the preferred shares sell for $114.50 per
share, and the bonds sell for 101 percent of par ($1,000), what weight should you use for
preferred stock in the computation of FarCry's WACC?
74. OMG Inc. has 4 million shares of common stock outstanding, 3 million shares of preferred
stock outstanding, and 5 thousand bonds. If the common shares sell for $17 per share, the
preferred shares sell for $126 per share, and the bonds sell for 117 percent of par ($1,000), what
weight should you use for preferred stock in the computation of OMG's WACC?
75. JLP Industries has 6.5 million shares of common stock outstanding with a market price of
$20.00 per share. The company also has outstanding preferred stock with a market value of $10
million, and 25,000 bonds outstanding, each with face value $1,000 and selling at 90 percent of
par value. The cost of equity is 14 percent, the cost of preferred is 10 percent, and the cost of
debt is 6.25 percent. If JLP's tax rate is 34 percent, what is the WACC?
76. TAFKAP Industries has 8 million shares of stock outstanding selling at $17 per share and
an issue of $20 million in 7.5 percent, annual coupon bonds with a maturity of 15 years, selling at
109 percent of par ($1,000). If TAFKAP's weighted average tax rate is 34% and its cost of equity
is 12.5 percent, what is TAFKAP's WACC?
77. Johnny Cake Ltd. has 10 million shares of stock outstanding selling at $20 per share and
an issue of $50 million in 8 percent, annual coupon bonds with a maturity of 13 years, selling at
93.5 percent of par ($1,000). If Johnny Cake's weighted average tax rate is 34 percent, its next
dividend is expected to be $2.00 per share, and all future dividends are expected to grow at 5
percent per year, indefinitely, what is its WACC?
78. A firm has 5,000,000 shares of common stock outstanding, each with a market price of
$8.00 per share. It has 25,000 bonds outstanding, each selling for $1,100 with a $1,000 face
value. The bonds mature in 12 years, have a coupon rate of 9 percent, and pay coupons semi-
annually. The firm's equity has a beta of 1.4, and the expected market return is 15 percent. The
tax rate is 35 percent and the WACC is 14 percent. Calculate the risk-free rate.
79. A firm has 5,000,000 shares of common stock outstanding, each with a market price of
$10.00 per share. It has 55,000 bonds outstanding, each selling for $990 with a $1,000 face value.
The bonds mature in 15 years, have a coupon rate of 8 percent, and pay coupons semi-annually.
The firm's equity has a beta of 2.0, and the expected market return is 15 percent. The tax rate is
35 percent and the WACC is 16 percent. Calculate the risk-free rate.
80. An all-equity firm is considering the projects shown as follows. The T-bill rate is 3
percent and the market risk premium is 6 percent. If the firm uses its current WACC of 12 percent
to evaluate these projects, which project(s), if any, will be incorrectly rejected?
81. An all-equity firm is considering the projects shown as follows. The T-bill rate is 4
percent and the market risk premium is 7 percent. If the firm uses its current WACC of 12 percent
to evaluate these projects, which project(s), if any, will be incorrectly accepted or rejected?
82. 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 0.5, 1.0,
1.3 and 1.6, respectively. If all current and future projects will be financed with half debt and half
equity, and if the current cost of equity (based on an average firm beta of 1.0 and a current risk-
free rate of 7 percent) is 14 percent and the after-tax yield on the company's bonds is 8 percent,
what are the WACCs for divisions A through D?
83. Suppose your firm has decided to use a divisional WACC approach to analyze projects.
The firm currently has 2 divisions, A and B, with betas for each division of 0.5 and 1.5,
respectively. If all current and future projects will be financed with half debt and half equity, and
if the current cost of equity (based on an average firm beta of 1.0 and a current risk-free rate of 5
percent) is 14 percent and the after-tax yield on the company's bonds is 6 percent, what are the
WACCs for divisions A and B?
84. Which of the following statements is correct?
85. Which of the following statements is correct?
86. Which of the following will impact the cost of equity component in the weighted average
cost of capital?
87. ADK Industries common shares sell for $40 per share. ADK expects to set their next
annual dividend at $1.75 per share. If ADK expects future dividends to grow at 7 percent per year,
indefinitely, the current risk-free rate is 4 percent, the expected rate on the market is 11 percent,
and the stock has a beta of 1.2, what should be the best estimate of the firm's cost of equity?
88. ADK Industries common shares sell for $60 per share. ADK expects to set their next
annual dividend at $3.75 per share. If ADK expects future dividends to grow at 9 percent per year,
indefinitely, the current risk-free rate is 4 percent, the expected rate on the market is 11 percent,
and the stock has a beta of 1.5, what should be the best estimate of the firm's cost of equity?
89. Which of the following will directly impact the cost of equity?
90. Which of the following will directly impact the cost of debt?
91. ADK has 30,000 15-year 9 percent annual coupon bonds outstanding. If the bonds
currently sell for 111 percent of par and the firm pays an average tax rate of 36 percent, what will
be the before-tax and after-tax component cost of debt?
