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71) The Corner Bakery has a debt-equity ratio of .53. The required return on assets is 13.5
percent and its cost of equity is 15.8 percent. What is the pretax cost of debt based on M&M
Proposition II with no taxes?
A) 8.78 percent
B) 10.68 percent
C) 9.16 percent
D) 7.56 percent
E) 8.40 percent
72) L.A. Clothing has expected earnings before interest and taxes of $63,300, an unlevered cost
of capital of 14.7 percent, and a combined tax rate of 23 percent. The company also has $11,000
of debt that carries a coupon rate of 7 percent. The debt is selling at par value. What is the value
of this company?
A) $342,579
B) $273,333
C) $284,108
D) $334,101
E) $305,476
73) Hanover Tech is currently an all-equity company that has 145,000 shares of stock
outstanding with a market price of $22 a share. The current cost of equity is 13.9 percent and the
tax rate is 21 percent. The company is considering adding $1.5 million of debt with a coupon rate
of 7.5 percent to its capital structure. The debt will be sold at par value. What is the levered value
of the equity?
A) $2.209 million
B) $2.005 million
C) $2.312 million
D) $2.012 million
E) $2.108 million
74) Lester's has expected earnings before interest and taxes of $74,800, an unlevered cost of
capital of 11.6 percent, and debt with both a book and face value of $84,000. The debt has a
coupon rate of 6.35 percent and the tax rate is 24 percent. What is the value of this company?
A) $403,136
B) $347,600
C) $510,229
D) $387,094
E) $428,507
75) The Book Worm is an unlevered company with an aftertax net income of $118,406. The
unlevered cost of capital is 13.8 percent and the tax rate is 21 percent. What is the value of this
company?
A) $557,709
B) $1,320,022
C) $858,014
D) $1,378,414
E) $952,607
76) An unlevered company has a cost of capital of 14.6 percent and earnings before interest and
taxes of $240,090. A levered company with the same operations and assets has a face value of
debt of $85,000 with a coupon rate of 7.5 percent that sells at par. The applicable tax rate is 22
percent. What is the value of the levered company?
A) $1,085,338
B) $1,398,257
C) $1,402,509
D) $1,301,373
E) $1,001,010
77) Mountain Groves has an unlevered cost of capital of 13.2 percent, a cost of debt of 8.3
percent, and a tax rate of 21 percent. What is the target debt-equity ratio if the targeted cost of
equity is 14.5 percent?
A) .54
B) .29
C) .34
D) .48
E) .33
78) Johnson Tire Distributors has debt with both a face and a market value of $35,000. This debt
has a coupon rate of 6.6 percent and pays interest annually. The expected earnings before interest
and taxes are $8,300, the tax rate is 21 percent, and the unlevered cost of capital is 10.9 percent.
What is the cost of equity?
A) 12.46 percent
B) 12.87 percent
C) 14.56 percent
D) 13.59 percent
E) 15.14 percent
79) Lamey Co. has an unlevered cost of capital of 12.3 percent, a total tax rate of 25 percent, and
expected earnings before interest and taxes of $32,840. The company has $60,000 in bonds
outstanding that sell at par and have a coupon rate of 7.2 percent. What is the cost of equity?
A) 13.78 percent
B) 13.36 percent
C) 13.94 percent
D) 14.07 percent
E) 14.29 percent
80) Key Motors has a cost of equity of 14.26 percent and an unlevered cost of capital of 11.34
percent. The company has $35,000 in debt that is selling at par value. The levered value of the
company is $79,000 and the tax rate is 21 percent. What is the pretax cost of debt?
A) 5.73 percent
B) 6.18 percent
C) 6.58 percent
D) 6.69 percent
E) 5.92 percent
81) LP Gas has a cost of equity of 16.31 percent and a pretax cost of debt of 7.8 percent. The
debt-equity ratio is .56 and the tax rate is 21 percent. What is the unlevered cost of capital?
A) 13.70 percent
B) 13.85 percent
C) 14.01 percent
D) 14.26 percent
E) 14.08 percent
82) Auto Care has a pretax cost of debt of 8.3 percent and an unlevered cost of capital of 13.7
percent. The total tax rate is 23 percent and the cost of equity is 15.6 percent. What is the debt-
equity ratio?
A) .47
B) .61
C) .53
D) .42
E) .46
83) Douglass & Frank has a debt-equity ratio of .61. The pretax cost of debt is 7.8 percent while
the unlevered cost of capital is 12.6 percent. What is the cost of equity if the tax rate is 21
percent?
A) 13.75 percent
B) 14.91 percent
C) 14.25 percent
D) 14.33 percent
E) 14.14 percent
84) The June Bug has a $565,000 bond issue outstanding. These bonds have a coupon rate of
6.65 percent, pay interest semiannually, and sell at 98.7 percent of face value. The tax rate is 21
percent. What is the amount of the annual interest tax shield?
A) $7,573
B) $6,907
C) $8,333
D) $7,890
E) $8,250
85) Georga's Restaurants has 7,000 bonds outstanding with a face value of $1,000 each, a market
price of $982, and a coupon rate of 6.95 percent. The interest is paid semiannually. What is the
amount of the annual interest tax shield if the tax rate is 23 percent?
A) $111,895
B) $113,323
C) $107,750
D) $110,420
E) $113,006
86) D. L. Tuckers has $57,000 of debt outstanding that is selling at par and has a coupon rate of
7.15 percent. The tax rate is 21 percent. What is the present value of the tax shield?
A) $11,647
B) $12,791
C) $13,106
D) $12,200
E) $11,970
87) Jamison's has expected earnings before interest and taxes of $11,900. Its unlevered cost of
capital is 12.8 percent and its tax rate is 21 percent. The company has debt with both a book and
a face value of $12,500. This debt has a coupon rate of 7.6 percent and pays interest annually.
What is the weighted average cost of capital?
A) 12.48 percent
B) 12.36 percent
C) 12.87 percent
D) 11.38 percent
E) 12.09 percent
88) KN Stitches has debt of $26,000, a leveraged value of $78,400, a pretax cost of debt of 7.05
percent, a cost of equity of 15.3 percent, and a tax rate of 21 percent. What is the weighted
average cost of capital?
A) 11.47 percent
B) 12.12 percent
C) 11.69 percent
D) 12.07 percent
E) 12.02 percent
89) Home Decor has a debt-equity ratio of .54. The cost of equity is 15.7 percent, the pretax cost
of debt is 6.8 percent, and the tax rate is 22 percent. What will be the cost of equity if the debt-
equity ratio is revised to .65?
A) 16.89 percent
B) 17.07 percent
C) 14.70 percent
D) 15.69 percent
E) 16.44 percent
90) Wholesale Supply has earnings before interest and taxes of $148,600. Both the book and the
market value of debt is $220,000. The unlevered cost of equity is 13.6 percent while the pretax
cost of debt is 7.4 percent. The tax rate is 21 percent. What is the weighted average cost of
capital?
A) 11.94 percent
B) 12.65 percent
C) 12.91 percent
D) 12.01 percent
E) 12.27 percent
91) SLG Corp. is an all-equity firm with a weighted average cost of capital of 10.02 percent. The
current market value of the equity is $13.4 million and the total tax rate is 22 percent. What is
EBIT?
A) $1,966,667
B) $2,021,194
C) $1,721,385
D) $2,095,385
E) $1,943,182
92) W.V. Trees has a debt-equity ratio of .64, a WACC of 10.8 percent, a pretax cost of debt of
7.9 percent, and a tax rate of 24 percent. What is the unlevered cost of equity capital?
A) 11.92 percent
B) 12.97 percent
C) 13.08 percent
D) 13.13 percent
E) 13.45 percent
93) KN&J expects its EBIT to be $147,000 every year forever. The company currently has no
debt but can borrow at 7.6 percent while its cost of equity is 14.6 percent. The tax rate is 21
percent. What will be the value of the company if it borrows $40,000 and uses the loan proceeds
to repurchase shares?
A) $654,452
B) $646,667
C) $803,811
D) $606,667
E) $681,588
94) Bruce & Co. expects its EBIT to be $165,000 every year forever. The company currently has
no debt but can borrow at 8.6 percent while its cost of equity is 14.7 percent. The tax rate is 21
percent. The company is planning to borrow $55,000 and use the loan proceeds to repurchase
shares. What will be the WACC after recapitalization?
A) 14.57 percent
B) 15.07 percent
C) 14.51 percent
D) 14.11 percent
E) 14.58 percent
95) New Schools is an all-equity company with an expected EBIT of $94,000 every year forever.
The company can borrow at 7.4 percent while its cost of equity is 13.9 percent. What will be the
value of the company if it converts to 50 percent debt given its total tax rate of 24 percent?
A) $500,916
B) $575,632
C) $477,407
D) $480,690
E) $532,408
