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Chapter 10 Problems
2. LL Incorporated's currently outstanding 11% coupon bonds have a yield to maturity of 8%. LL believes it could issue at par new bonds that would provide a similar yield to maturity. If its marginal tax rate is 35%, what is LL's after-tax cost of debt?
rd(1 - T) = 0.08(0.65) = 5.2%.
4. Burnwood Tech plans to issue some $60 par preferred stock with a 6% dividend.The stock is selling on the market for $70.00, and Burnwood must pay flotation costs of 5% of the market price. What is the cost of the preferred stock?
rps = [pic] = [pic] = 5.41%.
5. Summerdahl Resorts' common stock is currently trading at $36 a share. The stock is expected to pay a dividend of $3.00 a share at the end of the year (D1 _ $3.00), and the dividend is expected to grow at a constant rate of 5% a year. What is the cost of common equity?
P0 = $36; D1 = $3.00; g = 5%; rs = ?
rs = [pic] + g = ($3.00/$36.00) + 0.05 = 13.33%.
6. Booher Book Stores has a beta of 0.8. The yield on a 3-month T-bill is 4% and the yield on a 10-year T-bond is 6%. The market risk premium is 5.5%, but the stock market return in the previous years was 15%. What is the estimated cost of common equity using the CAPM?
rs = rRF + bi(RPM) = 0.06 + 0.8(0.055) = 10.4%.
7. Shi Importers' balance sheet shows $300 million in debt, $50 million in preferred stock, and $250 million in total common equity. Shi faces a 40% tax rate and the following data: rd _ 6%, rps _ 5.8%, and rs _ 12%. If Shi has a target capital structure of 30% debt, 5% preferred stock, and 65% common stock, what is Shi's WACC?
30% Debt; 5% Preferred Stock; 65% Equity; rd = 6%; T = 40%; rps = 5.8%; rs = 12%.
WACC = (wd)(rd)(1 - T) + (wps)(rps) + (wce)(rs)
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