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92. Plasti-tech Inc. is financed 60% with equity and 40% with debt. Currently, its debt has a
pretax interest rate of 12%. Plasti-tech's common stock trades at $15.00 per share and its most
recent dividend was $1.00. Future dividends are expected grow by 4%. If the tax rate is 34%, what
is Plasti-tech's WACC?
93. The capital structure for the CR Corporation includes bonds valued at $5,500 and
common stock valued at $11,000. If CR has an after-tax cost of debt of 6%, and a cost of common
stock of 16%, what is its WACC?
94. What is the yield to maturity on Dotte Inc.'s bonds if its after-tax cost of debt is 10% and
its tax rate is 35%?
95. Increasing debt financing will do all of the following
except:
96. Suppose an analyst estimates that free cash flow will be $2.43 million in year 5. What is
the present value of this free cash flow if the company cost of capital is 12%, the WACC is 10%,
and the equity cost of capital is 15%?
97. WACC can be used to determine the value of a firm by discounting the firm's:
98. How are the costs of debt and equity calculated?
99. How do firms compute the weighted-average cost of capital?
1.0.
100. How should the weighted-average cost of capital be applied to projects that are not
average-risk projects?
101. Why is it important to use market values rather than book values when determining the
weighted-average cost of capital?
102. Compute the weighted-average cost of capital for a firm with the following sources of
funds and corresponding required rates of return: $5 million common stock at 16%, $500,000
preferred stock at 10%, and $3 million debt at 9%. All amounts are listed at market values and the
firm's tax rate is 35%.
103. A firm has issued $20 million in long-term bonds that now have 10 years remaining until
maturity. The bonds carry an 8% annual coupon but are selling in the market for $877.10. The
firm also has $45 million in market value of common stock. For cost of capital purposes, what
portion of the firm is debt financed and what is the after-tax cost of debt, if the tax rate is 35%?
104. A proposed capital project will cost $20 million and generate $4 million annually in after-
tax cash flows for 10 years. The cost of capital for a project of this risk level is 12.2%. Should the
project be accepted? Why or why not?
105. What is a firm's weighted-average cost of capital if the stock has a beta of 1.45, Treasury
bills yield 5%, and the market portfolio offers an expected return of 14%? In addition to equity,
the firm finances 30% of its assets with debt that has a yield to maturity of 9%. The firm is in the
35% marginal tax bracket.
106. Calculate a firm's required rates of return for both of its equity components: Its common
stock sells for $50 per share and will pay a $6 dividend next year which is expected to grow at a
constant 5% rate. Its preferred stock sells for $22.50 per share and pays $1.80 in dividends. What
accounts for the difference in returns, given that these are both forms of equity?
107. Why can faulty decisions be made when all capital budgeting proposals are evaluated at
the firm's current weighted average cost of capital?
108. In addition to the tax shield offered by the federal government, debt has a lower required
rate of return than equity. Why don't firms have larger debt components in their capital structure
than what is commonly observed?
109. What is the present value of a company with a WACC of 12%, and the following cash
flows for years 1 to 5, respectively: $1 million, $1.25 million, $1.5 million, $1.75 million, $2 million.
After year 5, assume the firm will grow at 5% per year, indefinitely.
110. Can WACC ever be used to value an entire business?
111. What happens when the capital structure of a firm changes?
112. The Chief Financial Officer at HB Electronics notes that its cost of debt is below that of
equity. He reasons that the firm should use only debt to finance its new projects because
otherwise the firm will be forced to use more expensive equity to finance its new projects. In that
case, the firm might have to reject some projects that it would have accepted if the projects had
been evaluated at the lower cost of debt. Comment on this reasoning.
113. Why do firms compute the weighted-average cost of capital if they generally have
projects that vary greatly in their degree of risk?
