Question

You are the Chief Financial Officer of Incomprehensible Technologies Inc. (ITI). The CEO has asked you to calculate the firm’s overall WACC. Your team of analysts has presented you with the following data:

• Common Stock: The company has 50,000 shares of common stock outstanding that sells for $10 per share. The stock’s beta is 1.8, Treasury Bills are yielding 2%, and the expected return of the market is 7%.
• Bonds: The company also has 400 bonds outstanding with a par value of $1000 and make semi-annual coupon payments. The bonds have a coupon rate of 5%, there are 12.5 years to maturity, and they are currently selling on the market at $912.93.
• Preferred Stock: The company has 5,000 shares of preferred stock outstanding selling at $20 per share. The dividend on the Preferred Stock is $0.75 per quarter.
• Ignore the effect of taxes

Question 11: What is the company's cost of equity?

Multiple Choice

• 11.0%

• 14.6%

• 9.0%

• 12.6%

• 11.9%

  Question 12: What is the company's cost of debt?

  Multiple Choice

• 3.0%

• 5.0%

• 5.7%

• 6.0%

• 11.3%

  USE THE FOLLOWING DATA FOR QUESTIONS 11-14

  You are the Chief Financial Officer of Incomprehensible Technologies Inc. (ITI). The CEO has asked you to calculate the firm’s overall WACC. Your team of analysts has presented you with the following data:

• Common Stock: The company has 50,000 shares of common stock outstanding that sells for $10 per share. The stock’s beta is 1.8, Treasury Bills are yielding 2%, and the expected return of the market is 7%.
• Bonds: The company also has 400 bonds outstanding with a par value of $1000 and make semi-annual coupon payments. The bonds have a coupon rate of 5%, there are 12.5 years to maturity, and they are currently selling on the market at $912.93.
• Preferred Stock: The company has 5,000 shares of preferred stock outstanding selling at $20 per share. The dividend on the Preferred Stock is $0.75 per quarter.

• Question 13: What is the cost of the company's Preferred Stock?

  Multiple Choice

• 6.2%

• 3.8%

• 15.0%

• 4.4%

• 7.8%

  USE THE FOLLOWING DATA FOR QUESTIONS 11-14

  You are the Chief Financial Officer of Incomprehensible Technologies Inc. (ITI). The CEO has asked you to calculate the firm’s overall WACC. Your team of analysts has presented you with the following data:

• Common Stock: The company has 50,000 shares of common stock outstanding that sells for $10 per share. The stock’s beta is 1.8, Treasury Bills are yielding 2%, and the expected return of the market is 7%.
• Bonds: The company also has 400 bonds outstanding with a par value of $1000 and make semi-annual coupon payments. The bonds have a coupon rate of 5%, there are 12.5 years to maturity, and they are currently selling on the market at $912.93.
• Preferred Stock: The company has 5,000 shares of preferred stock outstanding selling at $20 per share. The dividend on the Preferred Stock is $0.75 per quarter.

• Question 14: What is the company's WACC?

  Multiple Choice

• 7.0%

• 8.2%

• 11.6%

• 8.9%

• 9.5%

• Ignore the effect of taxes
• Ignore the effect of taxes

Answer 1

11)Correct option is "a" -11%

Cost of equity =Risk free rate +[Beta(Return on market-risk free rate)]

= 2+ [1.8(7-2)]

= 2+[1.8*5]

= 2 + 9

= 11%

12)correct option is "d"-6%

There are two semiannual period in a year comprising of 6 months each

semiannual interest = 1000*5%*6/12 = 25

semiannual periods= 12.5*2= 25

cost of debt (semiannual) =[interest+ (face value-current price)/periods]/[(face value+price)/2]

=[25+(1000-912.93)/25]/[(1000+912.93)/2]

= [25+ (87.07/25)]/[1912.93/2]

=[25 + 3.4828]/956.465

= 28.4828/956.465

= .029779 or 2.9779% semiannually

Annual cost of debt= 2.9779*2 = 5.96% (rounded to 6%)

13)correct option is "c" -15%

Annual preferred dividend= .75*4=3 [4quarters in a year]

Cost of preferrd stock = annual dividenc/price

= 3/20

= .15 or 15%

14)correct option is "e"-9.5%

	cost	market value	market value weights	cost*market value weights
Debt	6%	400*912.93=365172	365172/965172= .37835	2.27
preferred stock	15%	5000*20=100000	100000/965172=.10361	1.55
common stock	11%	50000*10=500000	500000/965172=.51804	5.70
		965172		9.52% rounded to 9.5%