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XYZ Company issues common stock at a price of $25 a share

Finance

  1. XYZ Company issues common stock at a price of $25 a share. The firm expects to pay a dividend of $2.20 a share next year. If the dividend is expected to grow at 2.5% annually, what is XYZ's cost of common equity?
  2. Find the required rate of return for equity investors of a firm with a beta of 1.3 when the risk free rate is 5% and the return on the market is 13.6%.
  3. Plasti-tech Inc. is financed 60% with equity and 40% with debt. Currently, its debt has a pretax interest rate of 12%. Plasti-tech's common stock trades at $15.00 per share and its most recent dividend was $1.00. Future dividends are expected grow by 4%. If the tax rate is 34%, what is Plasti-tech's WACC?
  4. The capital structure for the CR Corporation includes bonds valued at $5,500 and common stock valued at $11,000. If CR has an after-tax cost of debt of 6%, and a cost of common stock of 16%, what is its WACC?
  5. What is the yield to maturity on Dotte Inc.'s bonds if its after-tax cost of debt is 10% and its tax rate is 35%?
  6. Increasing debt financing will do all of the following except:
  7. Suppose an analyst estimates that free cash flow will be $2.43 million in year 5. What is the present value of this free cash flow if the company cost of capital is 12%, the WACC is 10%, and the equity cost of capital is 15%?
  8. WACC can be used to determine the value of a firm by discounting the firm's:
  9. 12).
    Nodebt Inc. is a firm with all-equity financing. Its equity beta is .80. The Treasury bill rate is 2%, and the market risk premium is expected to be 8%.

    a. What is Nodebt's asset beta? (Round your answer to 2 decimal places.)


    b. What is Nodebt's WACC? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
  10. 9).
    Reactive Industries has the following capital structure. Its corporate tax rate is 35%.

    Security Market Value Required Rate
    of Return
    Debt $20 million 6%
    Preferred stock 10 million 8
    Common stock 50 million 12

    What is its WACC? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

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  1. XYZ Company issues common stock at a price of $25 a share. The firm expects to pay a dividend of $2.20 a share next year. If the dividend is expected to grow at 2.5% annually, what is XYZ's cost of common equity?

11.3%

  1. Find the required rate of return for equity investors of a firm with a beta of 1.3 when the risk free rate is 5% and the return on the market is 13.6%.

16.18%

  1. Plasti-tech Inc. is financed 60% with equity and 40% with debt. Currently, its debt has a pretax interest rate of 12%. Plasti-tech's common stock trades at $15.00 per share and its most recent dividend was $1.00. Future dividends are expected grow by 4%. If the tax rate is 34%, what is Plasti-tech's WACC?

9.73%

  1. The capital structure for the CR Corporation includes bonds valued at $5,500 and common stock valued at $11,000. If CR has an after-tax cost of debt of 6%, and a cost of common stock of 16%, what is its WACC?

12.67%

  1. What is the yield to maturity on Dotte Inc.'s bonds if its after-tax cost of debt is 10% and its tax rate is 35%?

15.38%

  1. Increasing debt financing will do all of the following except:

decrease the firm's cost of common equity

  1. Suppose an analyst estimates that free cash flow will be $2.43 million in year 5. What is the present value of this free cash flow if the company cost of capital is 12%, the WACC is 10%, and the equity cost of capital is 15%?

$1,508,839

  1. WACC can be used to determine the value of a firm by discounting the firm's:

free cash flows

  1. 12).
    Nodebt Inc. is a firm with all-equity financing. Its equity beta is .80. The Treasury bill rate is 2%, and the market risk premium is expected to be 8%.

    a. What is Nodebt's asset beta? (Round your answer to 2 decimal places.)


    b. What is Nodebt's WACC? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

a. Asset beta: .80

b. WACC: 8.40%

  1. 9).
    Reactive Industries has the following capital structure. Its corporate tax rate is 35%.

    Security Market Value Required Rate
    of Return
    Debt $20 million 6%
    Preferred stock 10 million 8
    Common stock 50 million 12

    What is its WACC? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

WACC: 9.475%

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