# Finance final study guide

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Finance final study guide
-Martin Industries just paid an annual dividend of \$1.30 a share. The market price of the stock is \$36.80 and the growth rate is 6.0 percent. What is the firm's cost of equity?
RE = [\$1.30 × (1 + 0.060)] / \$36.80 + 0.060 = 0.097446 = 9.74 percent (3)
- The Bet-r-Bilt Company has a 5-year bond outstanding with a 4.30 percent coupon. Interest payments are paid semi-annually. The face amount of the bond is \$1,000. This bond is currently selling for 93 percent of its face value. What is the company's pre-tax cost of debt? (3)
-Jensen's Travel Agency has 9 percent preferred stock outstanding that is currently selling for \$49 a share. The market rate of return is 15 percent and the firm's tax rate is 34 percent. What is Jensen's cost of preferred stock?
RP = (0.09 × \$100) / \$49 = 0.183673 = 18.37 percent (4)
- The Auto Group has 1,000 bonds outstanding that are selling for \$840 each. The company also has 8,300 shares of preferred stock at a market price of \$65 each. The common stock is priced at \$60 a share and there are 29,000 shares outstanding. What is the weight of the preferred stock as it relates to the firm's weighted average cost of capital?
WP = (8,300 × \$65) / [(1,000 × \$840) + (8,300 × \$65) + (29,000 × \$60)] = \$539,500 / \$3,119,500 = 0.1729 = 17.29 percent (2)
- Jack's Construction Co. has 100,000 bonds outstanding that are selling at par value. The bonds yield 10.3 percent. The company also has 4.8 million shares of common stock outstanding. The stock has a beta of 1.5 and sells for \$60 a share. The U.S. Treasury bill is yielding 4 percent and the market risk premium is 7 percent. Jack's tax rate is 35 percent. What is Jack's weighted average cost of capital? (4)
- Phil's Carvings, Inc. wants to have a weighted average cost of capital of 6.5 percent. The firm has an aftertax cost of debt of 4.4 percent and a cost of equity of 8.8 percent. What debt-equity ratio is needed for the firm to achieve their targeted weighted average cost of capital?

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