Question

Which of the following assets is NOT the operating assets A. Accounts Receivable B. Marketable Securities...

Which of the following assets is NOT the operating assets

A. Accounts Receivable B. Marketable Securities C. Net Fixed Assets D. Inventories

To help finance a major expansion, a company sold a noncallable bond several years ago that now has 15 years to maturity. This bond has a 5% annual coupon, paid semiannually, it sells at a price of $985, and it has a par value of $1,000. If the company’s tax rate is 21%, what component cost of debt should be used in the WACC calculation?

A.4.06

B.9.41

C.5.14

D.2.57

You were hired as a consultant to a company, whose target capital structure is 40% debt, 10% preferred, and 50% common equity. The after-tax cost of debt is 6.0%, the cost of preferred is 7.5%, and the cost of retained earnings is 13.25%. The firm will not be issuing any new stock. What is its WACC?

A. 9.48%

B. 9.78%

C. 10.07%

D. 10.37%

A Stock is selling for $50 in the market. The required rate of return is 9%. The most recent dividend pays is D0=$3 and dividends are expected to grow at a constant rate g. What is the capital gain for this stock?

A. 2.83 %

B.4.19%

C.4.81%

D.9.0%

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Homework Answers

Answer #1

Q1) C) Net fixed assets

Explanation: Net fixed assets are fixed assets and are used for long term investment.

Q2) A) 4.06%

Explanation: Using financial calculator to calculate the ytm

Inputs: N= 15 × 2 = 30

Pv= -985

Fv= 1,000

Pmt= 5% / 2 × 1,000 = 25

I/y= compute

We get, ytm of the bond as 2.57% × 2 = 5.14%

In calculation for wacc , we use after tax cost debt. Therefore, after tax cost of debt is

5.14% × (1 - 0.21) = 4.06%

Q3) B) 9.78%

Explanation: WACC= weight of debt × cost of debt + weight of preference share × cost of preference share + weight of equity × cost of equity

= 0.40 × 6% + 0.10 × 7.5% + 0.50 × 13.25%

= 2.4% + 0.75% + 6.625%

= 9.78%

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