75) Deep Mines has 43,800 shares of common stock outstanding with a beta of 1.54 and a
market price of $51 a share. There are 10,000 shares of 7 percent preferred stock outstanding
with a stated value of $100 per share and a market value of $83 a share. The 8 percent
semiannual bonds have a face value of $1,000 and are selling at 96 percent of par. There are
5,000 bonds outstanding that mature in 13 years. The market risk premium is 7.5 percent, T-bills
are yielding 3.6 percent, and the tax rate is 21 percent. What discount rate should the firm apply
to a new project’s cash flows if the project has the same risk as the company’s typical project?
A) 9.59 percent
B) 8.72 percent
C) 9.17 percent
D) 8.28 percent
E) 9.30 percent
76) AZ Products has 140,000 shares of common stock outstanding at a market price of $27 a
share. Next year’s annual dividend is expected to be $1.43 a share and the dividend growth rate is
2 percent. The company also has 2,500 bonds outstanding with a face value of $1,000 per bond.
The bonds have a pretax yield of 7.35 percent and sell at 98.2 percent of face value. The
company’s tax rate is 21 percent. What is the weighted average cost of capital?
A) 8.41 percent
B) 6.71 percent
C) 7.52 percent
D) 6.58 percent
E) 6.59 percent
77) Kelso’s has a debt-equity ratio of .62 and a tax rate of 21 percent. The firm does not issue
preferred stock. The cost of equity is 16.3 percent and the aftertax cost of debt is 5.21 percent.
What is the weighted average cost of capital?
A) 10.96 percent
B) 11.67 percent
C) 12.06 percent
D) 11.38 percent
E) 11.57 percent
78) Granite Works maintains a debt-equity ratio of .58 and has a tax rate of 21 percent. The
pretax cost of debt is 8.9 percent. There are 18,000 shares of stock outstanding with a beta of
1.42 and a market price of $23 a share. The current market risk premium is 7.8 percent and the
current risk-free rate is 3.1 percent. This year, the firm paid an annual dividend of $1.68 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?
A) 8.44 percent
B) 9.78 percent
C) 8.96 percent
D) 9.13 percent
E) 10.06 percent
79) Delta Lighting has 24,500 shares of common stock outstanding at a market price of $19 a
share. This stock was originally issued at $21 per share. The firm also has a bond issue
outstanding with a total face value of $250,000 which is selling for 94 percent of par. The cost of
equity is 12.6 percent while the aftertax cost of debt is 5.8 percent. The firm has a beta of 1.33
and a tax rate of 23 percent. What is the weighted average cost of capital?
A) 10.07 percent
B) 10.32 percent
C) 12.36 percent
D) 11.29 percent
E) 11.47 percent
80) The Market Outlet is an all-equity financed firm with a beta of 1.08 and a cost of equity of
12.58 percent. The risk-free rate of return is 3.6 percent. What discount rate should the firm
assign to a new project that has a beta of 1.22?
A) 13.33 percent
B) 13.58 percent
C) 13.74 percent
D) 14.14 percent
E) 14.36 percent
81) Silo Mills is an all-equity financed firm that has a beta of 1.18 and a cost of equity of 12.2
percent. The risk-free rate of return is 2.9 percent. The firm is currently considering a project that
has a beta of 1.03 and a project life of six years. What discount rate should be assigned to this
project?
A) 11.33 percent
B) 11.02 percent
C) 10.62 percent
D) 11.84 percent
E) 12.09 percent
82) Travis & Sons has a capital structure that is based on 45 percent debt, 5 percent preferred
stock, and 50 percent common stock. The pretax cost of debt is 8.3 percent, the cost of preferred
is 9.2 percent, and the cost of common stock is 15.4 percent. The tax rate is 21 percent. A project
is being considered that is equally as risky as the overall company. This project has initial costs
of $287,000 and annual cash inflows of $91,000, $248,000, and $145,000 over the next three
years, respectively. What is the projected net present value of this project?
A) $116,667
B) $121,802
C) $99,011
D) $104,308
E) $101,488
83) Panelli’s is analyzing a project with an initial cost of $139,000 and cash inflows of $74,000
in Year 1 and $86,000 in Year 2. This project is an extension of current operations and thus is
equally as risky as the current company. The company uses only debt and common stock to
finance its operations and maintains a debt-equity ratio of .39 The aftertax cost of debt is 5.1
percent, the cost of equity is 13.2 percent, and the tax rate is 21 percent. What is the projected net
present value of this project?
A) $411
B) $1,109
C) −$1,807
D) $938
E) −$2,399
84) Carson Electronics uses 58 percent common stock and 42 percent debt to finance its
operations. The aftertax cost of debt is 5.4 percent and the cost of equity is 15.3 percent.
Management is considering a project that will produce a cash inflow of $49,600 in the first year.
The cash inflows will then grow at 2.5 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?
A) $599,032
B) $573,941
C) $411,406
D) $482,979
E) $541,414
85) 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 1.2 percent to the company’s
overall cost of capital when evaluating this project. The project has an initial cash outlay of
$63,000 and projected cash inflows of $19,000 in Year 1, $34,000 in Year 2, and $28,000 in
Year 3. The firm uses 33 percent debt and 67 percent common stock as its capital structure. The
company’s cost of equity is 13.8 percent while the aftertax cost of debt for the firm is 5.7 percent.
What is the projected net present value of the new project?
A) −$409
B) $618
C) −$308
D) $427
E) $573
86) The Oil Derrick has an overall cost of equity of 12.7 percent and a beta of 1.13. The firm is
financed solely with common stock. The risk-free rate of return is 4.8 percent. What is an
appropriate cost of capital for a division within the firm that has an estimated beta of 1.16?
A) 12.37 percent
B) 12.41 percent
C) 12.54 percent
D) 12.67 percent
E) 12.91 percent