75.
The Green Paddle has a cost of equity of 12.1 percent and a pre-tax cost of debt of 7.6
percent. The debt-equity ratio is 0.65 and the tax rate is 32 percent. What is Green
Paddle’s unlevered cost of capital?
76.
Bob’s Warehouse has a pre-tax cost of debt of 8.4 percent and an unlevered cost of
capital of 14.6 percent. The firm’s tax rate is 37 percent and the cost of equity is 18
percent. What is the firm’s debt-equity ratio?
77.
Douglass & Frank has a debt-equity ratio of 0.35. The pre-tax cost of debt is 8.2 percent
while the unlevered cost of capital is 13.3 percent. What is the cost of equity if the tax rate
is 39 percent?
78.
The June Bug has a $270,000 bond issue outstanding. These bonds have a 7.5 percent
coupon, pay interest semiannually, and have a current market price equal to 98.6 percent
of face value. The tax rate is 39 percent. What is the amount of the annual interest tax
shield?
79.
Georga’s Restaurants has 5,000 bonds outstanding with a face value of $1,000 each and a
coupon rate of 8.25 percent. The interest is paid semi-annually. What is the amount of the
annual interest tax shield if the tax rate is 37 percent?
80.
D. L. Tuckers has $21,000 of debt outstanding that is selling at par and has a coupon rate
of 7.5 percent. The tax rate is 32 percent. What is the present value of the tax shield?
81.
Jemisen’s has expected earnings before interest and taxes of $6,200. Its unlevered cost of
capital is 14 percent and its tax rate is 34 percent. The firm has debt with both a book and
a face value of $2,500. This debt has a 9 percent coupon and pays interest annually. What
is the firm’s weighted average cost of capital?
82.
A firm has debt of $12,000, a leveraged value of $26,400, a pre-tax cost of debt of 9.20
percent, a cost of equity of 17.6 percent, and a tax rate of 37 percent. What is the firm’s
weighted average cost of capital?
83.
Young’s Home Supply has a debt-equity ratio of 0.80. The cost of equity is 14.5 percent
and the aftertax cost of debt is 4.9 percent. What will the firm’s cost of equity be if the
debt-equity ratio is revised to 0.70?
84.
Percy’s Wholesale Supply has earnings before interest and taxes of $106,000. Both the
book and the market value of debt is $170,000. The unlevered cost of equity is 15.5
percent while the pre-tax cost of debt is 8.6 percent. The tax rate is 38 percent. What is
the firm’s weighted average cost of capital?
85.
East Side, Inc. has no debt outstanding and a total market value of $136,000. Earnings
before interest and taxes, EBIT, are projected to be $12,000 if economic conditions are
normal. If there is strong expansion in the economy, then EBIT will be 27 percent higher. If
there is a recession, then EBIT will be 55 percent lower. East Side is considering a $54,000
debt issue with a 5 percent interest rate. The proceeds will be used to repurchase shares
of stock. There are currently 2,000 shares outstanding. Ignore taxes. If the economy enters
a recession, EPS will change by ____ percent as compared to a normal economy, assuming
that the firm recapitalizes.
86.
North Side, Inc. has no debt outstanding and a total market value of $175,000. Earnings
before interest and taxes, EBIT, are projected to be $16,000 if economic conditions are
normal. If there is strong expansion in the economy, then EBIT will be 30 percent higher. If
there is a recession, then EBIT will be 70 percent lower. North Side is considering a
$70,000 debt issue with a 7 percent interest rate. The proceeds will be used to repurchase
shares of stock. There are currently 2,500 shares outstanding. North Side has a tax rate of
34 percent. If the economy expands strongly, EPS will change by ____ percent as
compared to a normal economy, assuming that the firm recapitalizes.
87.
Galaxy Products is comparing two different capital structures, an all-equity plan (Plan I)
and a levered plan (Plan II). Under Plan I, Galaxy would have 178,500 shares of stock
outstanding. Under Plan II, there would be 71,400 shares of stock outstanding and $1.79
million in debt outstanding. The interest rate on the debt is 10 percent and there are no
taxes. What is the breakeven EBIT?