Question

Which of the following statements is (are) correct?
(x) Widgets, Inc. has preferred stock selling for 102.5 percent of par that pays a 5.75 percent annual coupon. The component cost of preferred stock for Widgets, Inc. is 5.61 percent.
(y) ABC Company stock has a beta of 0.9, the current risk-free rate is 3.2, and the expected return on the market is 12.5 percent. The cost of equity for ABC is more than 11.45 percent.
(z) When determining the appropriate weights used in calculating a WACC, it should reflect the relative sizes of the total book capitalizations for each kind of security that the firm issues.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (x) only

WBX Inc. has a $10 million (face value), 10-year bond issue selling for 98.45 percent of par that pays a coupon rate of 8.24 percent. Coupons are paid semi-annually. What would be WBX's before-tax component cost of debt?

A. 8.08% B. 8.16% C. 8.24% D. 8.43%
E. more than 8.43%

XCW, Inc. has a $15 million ($1000 face value) 15-year bond issue selling for 106.0 percent of par that carries a coupon rate of 8.0%, paid semi-annually. What is the firm’s before-tax component cost of debt?

A. 3.67% B. 4.06% C. 7.09%
D. 7.34% E. 8.12%

Answer 1

1.B. (x) and (y) only

X. Cost of Preferred Stock = Dividend / Market Value = 5.75 / 102.50 = 5.61 (Correct)

Y. Cost of Equity = Risk Free rate + Beta * (Market Return - Risk Free Rate) = 3.20% + 0.90 * (12.50 - 3.20%) = 11.57%(Correct)

Z. The Statement is incorrect because while calculating WACC we have to use weights in accordance with market values of security

2. Before Tax Semi Annual Cost of Debt = 4.24%

Bafore Tax Annual Cost of Debt = 4.24% * 2 = 8.48% Option E

3. Before Tax Semi Annual Cost of Debt = 3.67%

Before Tax Annual Cost of Debt = 3.67% * 2 = 7.34% option D