62.
Phillips Equipment has 80,000 bonds outstanding that are selling at par.
Bonds with similar characteristics are yielding 7.5 percent. The company
also has 750,000 shares of 7 percent preferred stock and 2.5 million shares
of common stock outstanding. The preferred stock sells for $65 a share.
The common stock has a beta of 1.34 and sells for $42 a share. The U.S.
Treasury bill is yielding 2.8 percent and the return on the market is 11.2
percent. The corporate tax rate is 38 percent. What is the firm’s weighted
average cost of capital?
63.
Wayco Industrial Supply has a pre-tax cost of debt of 7.6 percent, a cost of
equity of 14.3 percent, and a cost of preferred stock of 8.5 percent. The firm
has 220,000 shares of common stock outstanding at a market price of $27 a
share. There are 25,000 shares of preferred stock outstanding at a market
price of $41 a share. The bond issue has a face value of $550,000 and a
market quote of 101.2. The company’s tax rate is 37 percent. What is the
firm’s weighted average cost of capital?
64.
Central Systems, Inc. desires a weighted average cost of capital of 8
percent. The firm has an aftertax cost of debt of 5.4 percent and a cost of
equity of 15.2 percent. What debt-equity ratio is needed for the firm to
achieve its targeted weighted average cost of capital?
65.
R.S. Green has 250,000 shares of common stock outstanding at a market
price of $28 a share. Next year’s annual dividend is expected to be $1.55 a
share. The dividend growth rate is 2 percent. The firm also has 7,500 bonds
outstanding with a face value of $1,000 per bond. The bonds carry a 7
percent coupon, pay interest semiannually, and mature in 7.5 years. The
bonds are selling at 98 percent of face value. The company’s tax rate is 34
percent. What is the firm’s weighted average cost of capital?
66.
Kelso’s has a debt-equity ratio of 0.6 and a tax rate of 35 percent. The firm
does not issue preferred stock. The cost of equity is 14.5 percent and the
aftertax cost of debt is 4.8 percent. What is the weighted average cost of
capital?
67.
Granite Works maintains a debt-equity ratio of 0.65 and has a tax rate of 32
percent. The firm does not issue preferred stock. The pre-tax cost of debt is
9.8 percent. There are 25,000 shares of stock outstanding with a beta of 1.2
and a market price of $19 a share. The current market risk premium is 8.5
percent and the current risk-free rate is 3.6 percent. This year, the firm paid
an annual dividend of $1.10 a share and expects to increase that amount by
2 percent each year. Using an average expected cost of equity, what is the
weighted average cost of capital?
68.
Delta Lighting has 30,000 shares of common stock outstanding at a market
price of $15.00 a share. This stock was originally issued at $31 per share.
The firm also has a bond issue outstanding with a total face value of
$280,000 which is selling for 86 percent of par. The cost of equity is 13
percent while the aftertax cost of debt is 6.9 percent. The firm has a beta of
1.48 and a tax rate of 30 percent. What is the weighted average cost of
capital?
69.
The Market Outlet has a beta of 1.38 and a cost of equity of 14.945 percent.
The risk-free rate of return is 4.25 percent. What discount rate should the
firm assign to a new project that has a beta of 1.25?
70.
Silo Mills has a beta of 0.95 and a cost of equity of 11.9 percent. The risk–
free rate of return is 2.8 percent. The firm is currently considering a project
that has a beta of 1.03 and a project life of 6 years. What discount rate
should be assigned to this project?
71.
Travis & Sons has a capital structure which is based on 40 percent debt, 5
percent preferred stock, and 55 percent common stock. The pre-tax cost of
debt is 7.5 percent, the cost of preferred is 9 percent, and the cost of
common stock is 13 percent. The company’s tax rate is 39 percent. The
company is considering a project that is equally as risky as the overall firm.
This project has initial costs of $325,000 and annual cash inflows of
$87,000, $279,000, and $116,000 over the next three years, respectively.
What is the projected net present value of this project?
72.
Panelli’s is analyzing a project with an initial cost of $110,000 and cash
inflows of $65,000 in year one and $74,000 in year two. This project is an
extension of the firm’s current operations and thus is equally as risky as the
current firm. The firm uses only debt and common stock to finance its
operations and maintains a debt-equity ratio of 0.45. The aftertax cost of
debt is 4.8 percent, the cost of equity is 12.7 percent, and the tax rate is 35
percent. What is the projected net present value of this project?
73.
Carson Electronics uses 70 percent common stock and 30 percent debt to
finance its operations. The aftertax cost of debt is 5.4 percent and the cost
of equity is 15.4 percent. Management is considering a project that will
produce a cash inflow of $36,000 in the first year. The cash inflows will then
grow at 3 percent per year forever. What is the maximum amount the firm
can initially invest in this project to avoid a negative net present value for
the project?
74.
The Bakery is considering a new project it considers to be a little riskier
than its current operations. Thus, management has decided to add an
additional 1.5 percent to the company’s overall cost of capital when
evaluating this project. The project has an initial cash outlay of $58,000 and
projected cash inflows of $17,000 in year one, $28,000 in year two, and
$30,000 in year three. The firm uses 25 percent debt and 75 percent
common stock as its capital structure. The company’s cost of equity is 15.5
percent while the aftertax cost of debt for the firm is 6.1 percent. What is
the projected net present value of the new project?
75.
The Oil Derrick has an overall cost of equity of 13.6 percent and a beta of
1.28. The firm is financed solely with common stock. The risk-free rate of
return is 3.4 percent. What is an appropriate cost of capital for a division
within the firm that has an estimated beta of 1.18?
76.
Miller Sisters has an overall beta of 0.79 and a cost of equity of 11.2 percent
for the firm overall. The firm is 100 percent financed with common stock.
Division A within the firm has an estimated beta of 1.08 and is the riskiest
of all of the firm’s operations. What is an appropriate cost of capital for
division A if the market risk premium is 9.5 percent?
77.
Deep Mining and Precious Metals are separate firms that are both
considering a silver exploration project. Deep Mining is in the actual mining
business and has an aftertax cost of capital of 12.8 percent. Precious
Metals is in the precious gem retail business and has an aftertax cost of
capital of 10.6 percent. The project under consideration has initial costs of
$575,000 and anticipated annual cash inflows of $102,000 a year for ten
years. Which firm(s), if either, should accept this project?
78.
Sister Pools sells outdoor swimming pools and currently has an aftertax
cost of capital of 11.6 percent. Al’s Construction builds and sells water
features and fountains and has an aftertax cost of capital of 10.3 percent.
Sister Pools is considering building and selling its own water features and
fountains. The sales manager of Sister Pools estimates that the water
features and fountains would produce 20 percent of the firm’s future total
sales. The initial cash outlay for this project would be $85,000. The
expected net cash inflows are $17,000 a year for 7 years. What is the net
present value of the Sister Pools project?
79.
Decker’s is a chain of furniture retail stores. Furniture Fashions is a
furniture maker and a supplier to Decker’s. Decker’s has a beta of 1.38 as
compared to Furniture Fashion’s beta of 1.12. The risk-free rate of return is
3.5 percent and the market risk premium is 8 percent. What discount rate
should Decker’s use if it considers a project that involves the manufacturing
of furniture?
80.
Bleakly Enterprises has a capital structure of 40 percent common stock, 10
percent preferred stock, and 50 percent debt. The flotation costs are 4.5
percent for debt, 7 percent for preferred stock, and 9.5 percent for common
stock. The corporate tax rate is 34 percent. What is the weighted average
flotation cost?