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70. Assume a firm's debt is selling at face value. What is the firm's cost of debt if the debt
has a coupon rate of 7.5% and the tax rate is 35%?
71. What proportion of a firm is equity financed if the WACC is 14%, the after-tax cost of debt
is 7%, the tax rate is 35%, and the required return on equity is 18%?
72. What proportion of a firm is equity financed if the WACC is 14%, the before-tax cost of
debt is 10.77%, the tax rate is 35%, and the required return on equity is 18%?
73. A firm sells a product that it realizes is short-lived and thus the firm plans to close after 2
more years. The firm expects to have free cash flows of $398,000 next year and $211,000 in Year
2 after incurring the costs of closing. The firm's cost of equity is 14% and its cost of debt is 5.5%.
What is the present value of the firm if its debt to value ratio is 40%?
74. Al's Market plans to close after 3 more years. The firm expects to have free cash flows of
$148,000 next year, $128,000 in Year 2, and $65,000 in Year 3 after incurring the costs of closing.
The firm's cost of equity is 15.5% and its cost of debt is 6.2%. What is the present value of the
firm if its debt to value ratio is 30%?
75. A proposed project has a positive NPV when evaluated at the company cost of capital. If
the firm employs debt in its capital structure, will the project remain acceptable after evaluation
with the WACC?
76. What is the after-tax cost of preferred stock that pays a 12% dividend and sells at par if
the firm's tax rate is 35%?
77. What is the WACC for a firm with 40% debt, 20% preferred stock, and 40% equity if the
respective costs for these components are 6% after tax, 12% after tax, and 18% before tax? The
firm's tax rate is 35%.
78. What is the WACC for a firm with 40% debt, 20% preferred stock, and 40% equity if the
respective costs for these components are 9.23% before tax, 12% after tax, and 18% before tax?
The firm's tax rate is 35%.
79. A project will generate a $1 million net cash flow annually in perpetuity. If the project
costs $7 million, what is the break-even WACC?
80. Which one of the following changes offers the greatest chance of changing a project's
NPV from negative to positive?
81. What decision should be made on a project of above-average risk if the project's IRR
exceeds the WACC?
82. If equity investors require a 20% rate of return, what is the maximum acceptable amount
of equity financing for a project with $2 million annual cash flows before tax and interest, $3
million in debt with a 10% coupon, and a 35% tax rate?
83. For purposes of computing the WACC, if the book value of equity exceeds the market
value of equity, then:
84. How much cash flow before tax and interest is necessary to support a project that
requires $4 million annually for equity investors and $2 million annually in interest payments if
the firm's tax rate is 35%?
85. What percentage of value should be allocated to equity in WACC computations for a firm
with $50 million in debt selling at 85% of par, $50 million in book value of equity, and $65 million
in market value of equity?
86. According to CAPM estimates, what is the cost of equity for a firm with a beta of 1.5
when the risk-free interest rate is 6% and the expected return on the market portfolio is 15%?
87. What return on equity do investors seem to expect for a firm with a $55 share price, an
expected dividend of $4.60, a beta of 0.9, and a constant growth rate of 3.5%?
88. Changing the capital structure by adding debt will
not
:
89. The company cost of capital:
90. XYZ Company issues common stock at a price of $25 a share. The firm expects to pay a
dividend of $2.20 a share next year. If the dividend is expected to grow at 2.5% annually, what is
XYZ's cost of common equity?
91. Find the required rate of return for equity investors of a firm with a beta of 1.3 when the
risk free rate is 5% and the return on the market is 13.6%.
