Question

Assume ALFA Company has a bond issue with a ytm of 5% The company has 3,200,000 shares of common stock outstanding with a dividend growth rate of 1.2%. They will issue a 75 cent dividend next week and their beta is 1.2. The T-Bill rate is 2% They have 10,000,000.00 in preferred stock (which is 15% of their equity) with a 7.55% dividend. The company’s tax rate is 35%. The capital structure is 60% equity and 40% debt. The market risk premium is 6.5%

What is the company’s cost of equity?

A. .0612

C. .0490

E. None of the above

B. .0420

D. .0250

16. What is the company’s after tax cost of debt?

A. .05%

C. .02

E. none of the above

B. 5%

D .013

17. What is the Wacc ?

A. .0068

C. .0499

E. none of the above

B. .0698

D. .096

18. This company is:

A. More volatile than the market

D. All of the above

B. Less Volatile than the market

E. None of the above

C. Not enough information to determine

Answer 1

Assume ALFA Company has a bond issue with a ytm of 5% The company has 3,200,000 shares of common stock outstanding with a dividend growth rate of 1.2%. They will issue a 75 cent dividend next week and their beta is 1.2. The T-Bill rate is 2% They have 10,000,000.00 in preferred stock (which is 15% of their equity) with a 7.55% dividend. The company’s tax rate is 35%. The capital structure is 60% equity and 40% debt. The market risk premium is 6.5%

Q15:

Following is the calcualtion of cost of equity using the CAPM equation:

Therefore, none of the above is the correct answer

Q 16. Company’s after tax cost of debt is calculated below:

Q 17: WACC is calculated below

As out of total shares 15% is preference shares the remaining 18% is equity shares and the and 40% is debt

Q 18:

The company is More volatile than the market as the beta is 1.2 which is higher than the beta of market i.e. 1. Beta is the sensitivity of systematic or non diversifiable risk.