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42. How much will a firm need in cash flow before tax and interest to satisfy debtholders and
equityholders if the tax rate is 40%, there is $10 million in common stock requiring a 12% return,
and $6 million in bonds requiring an 8% return?
43. How much will a firm need in cash flow before tax and interest to satisfy debtholders and
equityholders if the tax rate is 35%, there is $13 million in common stock requiring a 10% return,
and $6 million in bonds requiring a 6% return?
44. Which one of the following statements is
incorrect
concerning the equity component of
the WACC?
45. What will be the effect of using the book value of debt in WACC decisions if interest rates
have decreased substantially since a firm's long-term bonds were issued?
46. A firm has 12,000 shares of common stock outstanding with a book value of $20 per
share and a market value of $39. There are 5,000 shares of preferred stock with a book value of
$10 and a market value of $26. There is a $400,000 face value bond issue outstanding that is
selling at 87% of par. What weight should be placed on the preferred stock when computing the
firm's WACC?
0.1374, or 13.74%
47. What would you estimate as the cost of equity if a stock sells for $40, pays a $4.25
dividend, and is expected to grow at a constant rate of 5%?
48. What is the expected growth rate in dividends for a firm in which shareholders require an
18% rate of return and the dividend yield is 10%?
49. What dividend is paid on preferred stock if investors require a 9% rate of return and the
stock has a market value of $54 per share and a book value of $50 per share?
50. If a firm earns the WACC as an average return on its average-risk assets, then:
51. As debt is added to the capital structure, the:
52. An implicit cost of increasing the proportion of debt in a firm's capital structure is that:
53. A firm is considering a project that will generate perpetual cash flows of $50,000 per year
beginning next year. The project has the same risk as the firm's overall operations. If the firm's
WACC is 12%, and its debt-to-equity ratio is 1.33, what is the most it could pay for the project
and still earn its required rate of return?
54. A firm's WACC:
55. An increase in which one of the following is most apt to decrease the WACC of a firm that
has both debt and equity in its capital structure?
56. Calculate a firm's WACC given that the total value of the firm is $2 million, $600,000 of
which is debt, the pre-tax cost of debt is 10%, and the cost of equity is 15%. The firm pays no
taxes.
57. A company's CFO wants to maintain a target debt-to-equity ratio of 1/4. If the WACC is
18.6%, and the pretax cost of debt is 9.4%, what is the cost of common equity assuming a tax rate
of 34%?
58. For a company that pays no corporate taxes, its WACC will be equal to:
59. The yield-to-maturity of a firm's bond is 8.5%. The firm has a beta of 1.3 and a tax rate of
34%. The market risk premium is 8.4% and the risk-free rate is 3.8%. What is the firm's WACC if
the firm has a capital structure that is 40% debt financed?
60. If a firm has twice as much equity as debt in its capital structure, then the firm is
financed with:
61. If a firm has three times as much equity as debt in its capital structure, then the firm is
financed with:
62. If a company's cost of capital is less than the required return on equity, then the firm:
63. The company cost of capital is the return that is expected on a portfolio of the
company's:
64. A firm with a beta of 1.22 just paid its annual dividend of $5.64 a share. The dividends
increase at a rate of 2% annually. The risk-free rate is 3.5%, the market rate of return is 12.4%,
and the dividend discount rate is 11.6%. What is the best estimate of the firm's cost of equity if
the firm's stock currently sells for $60 a share using an average of methods?
65. What is the WACC for a firm financed with 30% debt if the debt requires an after-tax
return of 10% and equity requires a 16% return?
66. Which one of the following changes would tend to increase the WACC for a traditional
firm?
67. A firm is considering expanding its current operations and has determined the internal
rate of return on that expansion is 12.2%. The firm's WACC is 11.8%. Given this, you know the:
68. A firm has 12,500 shares of stock outstanding that sell for $42 each. The book value of
equity is $400,000. The firm has also issued $250,000 face value of debt that is currently quoted
at 101.2. What value should be used as the weight of equity when computing WACC?
69. Assume a tax-paying firm is currently financed with 50% debt and 50% equity. The after-
tax cost of debt is 6% and the cost of equity is 12%. If the firm issues some 8% preferred stock at
par, then the firm's WACC will:
