What appears to be the targeted debt ratio of a firm that issues $15 million in bonds and $35 million in equity to finance its new capital projects?
A.
15%
B.
30%
C.
35%
D.
43%
To calculate the present value of a business, the firm's free cash flows should be discounted at the firm's:
A.
weighted-average cost of capital.
B.
pre-tax cost of debt.
C.
aftertax cost of debt.
D.
cost of equity.
The weighted-average cost of capital for a firm with a 65/35 debt/equity split, 8% pre-tax cost of debt, 15% cost of equity, and a 35% tax rate would be:
A.
8.63%.
B.
9.12%.
C.
10.45%.
D.
13.80%.
The weighted-average cost of capital for a firm with a 40/60 debt/equity split, 8% cost of debt, 15% cost of equity, and a 34% tax rate would be:
A.
12.20%.
B.
8.63%.
C.
11.11%.
D.
13.80%.
Why is debt financing said to include a tax shield for the company?
A.
Taxes are reduced by the amount of the debt.
B.
Taxes are reduced by the amount of the interest.
C.
Taxable income is reduced by the amount of the debt.
D.
Taxable income is reduced by the amount of the interest.
What is the pretax cost of debt for a firm in the 35% tax bracket that has a 10% aftertax cost of debt?
A.
5.85%
B.
12.15%
C.
15.38%
D.
25.71%
How much is added to a firm's weighted-average cost of capital for 45% debt financing with a required rate of return of 10% and a tax rate of 35%?
A.
1.29%
B.
2.93%
C.
3.50%
D.
4.50%
What is the WACC for a firm with 50% debt and 50% equity that pays 12% on its debt, 20% on its equity, and has a 40% tax rate?
A.
9.6%
B.
12.0%
C.
13.6%
D.
16.0%
Company X has 2 million shares of common stock outstanding at a book value of $2 per share. The stock trades for $3 per share. It also has $2 million in face value of debt that trades at 90% of par. What is the weight of debt for WACC purposes?
