Question

Kenny Electric Company's noncallable bonds were issued several years ago and now have 20 years to maturity. These bonds have a 9.25% annual coupon, paid semiannually, sells at a price of $1,075, and has a par value of $1,000. If the firm's tax rate is 40%, what is the component cost of debt for use in the WACC calculation?

a. 4.58%

b. 4.35%

c. 4.83%

d. 5.33%

e. 5.08%

Perpetual preferred stock from Franklin Inc. sells for $97.50 per share, and it pays an $8.50 annual dividend. If the company were to sell a new preferred issue, it would incur a flotation cost of 4.00% of the price paid by investors. What is the company's cost of preferred stock for use in calculating the WACC?

a. 8.72%

b. 10.22%

c. 9.08%

d. 9.44%

e. 9.82%

When working with the CAPM, which of the following factors can be determined with the most precision?

a. The beta coefficient, bi, of a relatively safe stock.

b. The most appropriate risk-free rate, rRF.

c. The market risk premium (RPM).

d. The beta coefficient of "the market," which is the same as the beta of an average stock.

e. The expected rate of return on the market, rM.

Bartlett Company's target capital structure is 40% debt, 15% preferred, and 45% common equity. The after-tax cost of debt is 6.00%, the cost of preferred is 7.50%, and the cost of common using reinvested earnings is 12.75%. The firm will not be issuing any new stock. You were hired as a consultant to help determine their cost of capital. What is its WACC?

a. 9.54%

b. 8.98%

c. 9.26%

d. 10.12%

e. 9.83%

Avery Corporation's target capital structure is 35% debt, 10% preferred, and 55% common equity. The interest rate on new debt is 6.50%, the yield on the preferred is 6.00%, the cost of common from reinvested earnings is 11.25%, and the tax rate is 40%. The firm will not be issuing any new common stock. What is Avery's WACC?

a. 9.17%

b. 9.54%

c. 8.82%

d. 8.48%

e. 8.15%

Answer 1

1

K = Nx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =20x2

1075 =∑ [(9.25*1000/200)/(1 + YTM/200)^k]     +   1000/(1 + YTM/200)^20x2

k=1

YTM% = 8.47

After tax rate = YTM * (1-Tax rate)

After tax rate = 8.47 * (1-0.4)

After tax rate = 5.08

2

cost of preferred equity

cost of preferred equity = Preferred dividend/price*(1-flotation %)*100

cost of preferred equity = 8.5/(97.5*(1-0.04))*100

=9.08

Please ask remaining parts seperately, questions are unrelated, I have done one bonus