Q1:

A. List:

WACC= (%of debt) (after-tax cost of debt) + (% of preferred stock)(Cost of preferred stock) + (% of common equity) (Cost of common equity) =WdRd * (1-T) + WpsRps + WceRs

Wd – the weights used for debt,

Wps – the weights used for preferred equity,

Wce – the weights used for common equity, rd – before-tax cost of debt, rps – cost of preferred stock, rs – cost of common equity,

T – marginal tax rate

B.

Book weight of debt=long-term debt/ total capital=30.94%

Book weight of preferred stock= Preferred stock / total capital=7.73%

Book weight of common equity= common equity/ total capital=61.33%

C.

The weight of debt= 80.77%

The weight of preferred stock=16.32%

The weight of common stock=2.9%

D.

Book value are better for calculating the firm's weighted average cost of capital. Firstly, book value numbers are showed on the financial statement. Secondly, the bond rating agencies like to pay attention on book value. Thirdly, book value are more stable than market value, the book value weight can produce more stable inputs for using in capital budgeting.

Q2:

A.

Ace Repair's current method of estimating its before tax cost of debt is using a before-tax debt cost of 10 percent, that equals the coupon rate on Ace's last long-term first mortgage bond issue in 1993. And these bonds will mature in 17 years, and can be called in 3 years. So, Ace Repair's current methods of estimating it’s before tax cost would equal to the coupon rate. That means the firm is currently paying a 2% risk premium and the 8% being paid by other A-rated corporate long-term bonds.

B.

It is not an appropriate measure of the firm's cost of equity. Because the earnings yield is lower than WACC. Because the earnings per share of $2.30 and a share price of $30.50, the E/P is 7.5%. And the cost of equity should be based on the dividend yield and capital gain.

Q3:

A.

The best estimate of Ace's cost of debt:

Rd= 8.30%

T= 40%

After-tax