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49) LT Transport is an unlevered firm with a total market value of $672,000 and 50,000 shares of
stock outstanding. The firm has expected EBIT of $64,500 if the economy is normal and $73,000
if the economy booms. The firm is considering a bond issue of $33,600 with an attached interest
rate of 7.6 percent. The bond proceeds will be used to repurchase shares. The tax rate is 34 percent.
What is the percentage increase in EPS if the economy booms rather than be normal?
A) 10.78%
B) 11.42%
C) 12.84%
D) 10.28%
E) 13.72%
50) Delta Mills and Franklin Mill are identical firms except for their capital structures. Delta is an
unlevered firm with $680,000 of equity. Franklin is a levered firm with $425,000 of equity and
$255,000 of debt at an interest rate of 6.2 percent. Both Delta and Franklin have an expected EBIT
of $84,000. Ignore taxes. Delta has a WACC of ________ percent and Franklin's WACC is
________ percent.
A) 12.35; 11.05
B) 12.35; 14.10
C) 12.35; 12.35
D) 14.10; 14.10
E) 16.10; 14.10
51) A firm has zero debt and an overall cost of capital of 11.7 percent. The firm is considering a
new capital structure with 45 percent debt at an interest rate of 6.8 percent. Assume there are no
taxes or other imperfections. What will be the levered cost of equity?
A) 16.47%
B) 14.67%
C) 15.80%
D) 15.71%
E) 16.16%
21
52) The Grist Mill has no debt, a total market value of $319,200, and 24,000 shares of stock
outstanding. The firm has expected EBIT of $21,000 if the economy is normal and $24,000 if the
economy booms. The firm is considering a bond issue of $79,800 with an attached interest rate of
5.9 percent. The bond proceeds will be used to repurchase shares. The tax rate is 35 percent. What
is the percentage increase in EPS if the economy booms rather than be normal?
A) 18.78%
B) 18.67%
C) 19.34%
D) 18.41%
E) 19.29%
53) Sewing World has an all-equity cost of capital of 11.72 percent, a levered cost of equity of
12.94 percent, and a pretax cost of debt of 6.8 percent. What is the firm's levered debt-equity ratio
if you ignore taxes?
A) 0.248
B) 0.333
C) 0.347
D) 0.264
E) 0.317
54) A firm has a debt-equity ratio of 0.45, an unlevered WACC of 12.68 percent, and a pretax cost
of debt of 6.8 percent. What is the levered cost of equity if there are no taxes or other
imperfections?
A) 13.68%
B) 15.58%
C) 15.33%
D) 13.72%
E) 14.67%
55) A firm has a debt-equity ratio of 1. Its cost of equity is 17.4 percent and its pretax cost of debt
is 7.2 percent. Assume there are no taxes or other imperfections. What would be its cost of equity if
the debt-equity ratio were zero?
A) 8.8%
B) 10.9%
C) 12.3%
D) 13.1%
E) 11.6%
56) Wilt's has a debt-equity ratio of 0.48, a pretax cost of debt of 7.3 percent, and an unlevered cost
of capital of 14.1 percent. What is its levered cost of equity if there are no taxes or other
imperfections?
A) 19.65%
B) 15.55%
C) 18.20%
D) 17.36%
E) 16.45%
57) The Border Crossing has no debt and a cost of capital of 12.2 percent. The shareholders would
prefer to earn rate of return of 16.4 percent. What debt-equity ratio will be required to meet the
shareholder's preference if the firm pays no taxes and can borrow at 6.2 percent?
A) 67%
B) 33%
C) 54%
D) 46%
E) 70%
58) An all-equity firm has expected earnings of $14,200 and a market value of $82,271. The firm is
planning to issue $15,000 of debt at 6.3 percent interest and use the proceeds to repurchase shares
at their current market value. Ignore taxes. What will be the cost of equity after the repurchase?
A) 17.99%
B) 18.08%
C) 19.70%
D) 18.97%
E) 19.55%
59) An unlevered firm has expected earnings of $37,584 and a market value of equity of $324,000.
The firm is planning to issue $65,000 of debt at 6.6 percent interest and use the proceeds to
repurchase shares at their current market value. Ignore taxes. What will be the cost of equity after
the repurchase?
A) 12.85%
B) 13.58%
C) 13.40%
D) 12.04%
E) 12.48%
60) Presley Cleaners has an all-equity capital structure with an equity value of $94,260. The
expected earnings are $11,320 based on estimated sales of $60,000. The firm pays no taxes and can
borrow at 6.4 percent. What is the value of RWACC?
A) 12.01%
B) 12.29%
C) 11.83%
D) 12.34%
E) 12.16%
61) Alto and Tenor have 17,400 shares of stock outstanding at a market price of $27 per share. The
firm also has $140,000 of 6.2 percent bonds outstanding that are selling at par. The firm does not
expect to pay taxes for the foreseeable future. The cost of equity is 15.3 percent. What is the value
of RWACC?
A) 13.21%
B) 17.38%
C) 10.83%
D) 14.64%
E) 11.09%
62) JL Lumber has a debt-equity ratio of 0.47. The firm's required return on assets is 11.8 percent
and its current cost of equity is 14.23 percent. What is the firm's pretax cost of debt? Ignore taxes.
A) 6.45%
B) 6.03%
C) 6.55%
D) 6.40%
E) 6.63%
63) The Studio is currently an all-equity firm that has 68,000 shares of stock outstanding with a
market price of $36.80 a share. The current cost of equity is 11.7 percent, and the tax rate is 35
percent. The firm is considering adding $750,000 of debt with a coupon rate of 5.8 percent to its
capital structure. The debt will be sold at par value. What is the levered value of the equity?
A) $2,014,900
B) $3,035,500
C) $1,785,000
D) $2,005,200
E) $1,806,400
64) Dakota Co. has expected earnings before interest and taxes of $37,800, an unlevered cost of
capital of 12.2 percent, debt with a coupon rate of 5.6 percent, and both a book and face value of
$24,000. The tax rate is 35 percent. What is the value of the firm?
A) $210,408.15
B) $209,106.11
C) $209,793.44
D) $218,406.11
E) $201,393.44
65) Leisure Vacations is an unlevered firm with aftertax net income of $57,980, a cost of capital of
13.2 percent, and a tax rate of 35 percent. What is the value of this firm?
A) $285,507.58
B) $318,906.15
C) $401,008.47
D) $439,242.42
E) $368,511.12
66) An unlevered firm has a cost of capital of 13.8 percent and earnings before interest and taxes of
$214,560. Assume the firm borrows $430,000 at an interest rate of 5.85 percent. The applicable tax
rate is 35 percent. What is the value of the levered firm?
A) $1,209,518.70
B) $1,007,018.11
C) $1,161,108.70
D) $1,246,082.19
E) $1,105,018.11
67) Sun Sports has an unlevered cost of capital of 14.3 percent, a cost of debt of 8.7 percent, and a
tax rate of 35 percent. What is the target debt-equity ratio if the targeted levered cost of equity is
16.34 percent?
A) 0.44
B) 0.56
C) 0.51
D) 0.63
E) 0.47
68) The Pizza Shoppe has debt with both a face and market value of $24,000 and a coupon rate of
6.4 percent. The expected earnings before interest and taxes are $21,400, the tax rate is 35 percent,
and the unlevered cost of capital is 11.4 percent. What is the firm's cost of equity?
A) 13.25%
B) 12.89%
C) 13.92%
D) 12.13%
E) 14.25%
30
69) The Outlet has an unlevered cost of capital of 15.1 percent, a tax rate of 34 percent, and
expected earnings before interest and taxes of $26,100. The company has $25,000 in bonds
outstanding that have a coupon rate of 7.6 percent. The bonds are selling at par. What is the cost of
equity?
A) 14.31%
B) 15.08%
C) 16.59%
D) 14.64%
E) 16.37%
70) DL Trucking has a cost of equity of 15.4 percent and an unlevered cost of capital of 13.2
percent. The company has $24,000 in debt that is selling at par value. The levered value of the firm
is $59,000 and the tax rate is 34 percent. What is the pretax cost of debt?
A) 8.75%
B) 8.34%
C) 7.38%
D) 9.20%
E) 9.69%
71) The Border Cafe has a cost of equity of 13.2 percent and a pretax cost of debt of 7.5 percent.
The debt-equity ratio is 0.6 and the tax rate is 35 percent. What is the unlevered cost of capital?
A) 11.60%
B) 12.30%
C) 11.97%
D) 12.08%
E) 10.80%
72) A levered firm has a pretax cost of debt of 6.8 percent and an unlevered cost of capital of 13.4
percent. The tax rate is 34 percent, and the cost of equity is 16.06 percent. What is the debt-equity
ratio?
A) 0.57
B) 0.45
C) 0.51
D) 0.47
E) 0.61
73) Travel Express has a debt-equity ratio of 0.42. The pretax cost of debt is 7.1 percent while the
unlevered cost of capital is 13.6 percent. What is the cost of equity if the tax rate is 34 percent?
A) 17.52%
B) 13.78%
C) 15.40%
D) 17.83%
E) 14.30%
74) Models and More has a bond issue outstanding with a face value of $215,000. These bonds
have a coupon rate of 5.65 percent, pay interest semiannually, and have a current market price
quote of 1.01. The tax rate is 34 percent. What is the amount of the annual interest tax shield?
A) $5,125.50
B) $4,130.15
C) $4,176.13
D) $4,171.45
E) $5,297.89
75) Ernie's has 4,200 bonds outstanding with a face value of $1,000 each, a market value of $1,060
each, and a coupon rate of 7.6 percent. What is the amount of the annual interest tax shield if the
tax rate is 35 percent?
A) $118,423
B) $99,714
C) $100,780
D) $111,720
E) $102,250
76) Baker Breads has $428,000 of debt outstanding that is selling at par and has a coupon rate of
6.25 percent. The tax rate is 34 percent. What is the present value of the tax shield?
A) $9,095
B) $10,459
C) $52,760
D) $145,520
E) $147,600
77) Andrea's Markets has debt of $318,200, equity of $493,500, an aftertax cost of debt of 6.80
percent, a cost of equity of 13.39 percent, and a tax rate of 34 percent. What is the firm's weighted
average cost of capital?
A) 9.90%
B) 10.94%
C) 9.87%
D) 10.81%
E) 10.05%
78) An all-equity firm has a cost of capital of 13.3 percent. The firm is considering switching to a
debt-equity ratio of 0.35 with a pretax cost of debt of 7.5 percent. The tax rate is 35 percent. What
will be the firm's levered cost of equity?
A) 15.25%
B) 14.21%
C) 16.07%
D) 14.62%
E) 15.38%
79) Houston Tools has expected earnings before interest and taxes of $189,400, an unlevered cost
of capital of 12.87 percent, and a tax rate of 34 percent. The company has $318,000 of debt that
carries a coupon rate of 6.2 percent. The debt is selling at par value. What is the value of this firm?
A) $996,758.89
B) $1,079,402.05
C) $978,758.89
D) $1,113,758.89
E) $1,036,758.89
80) An unlevered firm has a cost of capital of 12.46 percent and a tax rate of 35 percent. The firm
is considering a new capital structure with 35 percent debt. The interest rate on the debt would be
6.68 percent. What would be the firm's levered cost of capital?
A) 14.48%
B) 14.78%
C) 13.90%
D) 14.27%
E) 13.94%
