Dinklage Corp. has 8 million shares of common stock outstanding. The current share price is $82, and the book value per share is $6. The company also has two bond issues outstanding. The first bond issue has a face value of $135 million, a coupon rate of 7 percent, and sells for 93 percent of par. The second issue has a face value of $120 million, a coupon rate of 6 percent, and sells for 102 percent of par. The first issue matures in 25 years, the second in 9 years. Suppose the most recent dividend was $4.90 and the dividend growth rate is 5.4 percent. Assume that the overall cost of debt is the weighted average of that implied by the two outstanding debt issues. Both bonds make semiannual payments. The tax rate is 23 percent. What is the company’s WACC

XYZ has 9 million shares of stock outstanding. The current share price is $50, and the

book value per share is $6. The firm also has two bond issues outstanding. The first

bond issue has a face value of $70 million and an 8% annual coupon; it sells for 95% of

par. The second bond has a face value of $60 million and a 7% annual coupon; it sells for

97% of par. The first bond matures in 10 years, whereas the second matures in 5 years.

(a) What are XYZ’s capital structure weights on a book value basis?

(b) What are XYZ’s capital structure weights on a market value basis?

(c) Suppose the company’s stock has a beta of 1.5. The risk-free rate is 5% and the market

risk premium is 8%. What is the company’sWACC if the tax rate is 30%?

Jimmy Football is retiring from his sport. Under terms defined by his professional league, Jimmy has a choice. He can receive either (a) monthly payments of $21,000 each for 20 years (240 total monthly payments) with the first monthly payment occurring precisely five years from today or (b) monthly payments of $19,000 each for 20 years (240 total monthly payments) with the first monthly payment occurring one month from today. A discount rate of 2.64%/year is appropriate for valuing these cash flows. An innovative investments firm in Dallas, TX wants to purchase the rights to this retirement package today. Jimmy is interested in selling the rights in exchange for a lump sum of cash today. Both parties agree on all information provided here. Calculate a fair price at which such an exchange could occur.

Masterson, INC., has 7 million shares of common stock outstanding. The current share price is $83, and the book value per share is $8. The company also has two bond issues outstanding. The first bond issue has a face value os $140 million, has a coupon rate of 6 percent, and sells for 94 percent of par. The second issue has a face value of $125 million, has a coupon rate of 5 percent, and sells for 105 percent of par. The first issue matures in 25 years, the second in 8 years. Both bonds make semiannual coupon payments.

a. What are the company's capital structure weights on a book value basis?

b.What are the company's capital structure weights on a market value basis?

c.Which are more relevant, the book or market value weights?

Dinklage Corp. has 10.1 million shares of common stock outstanding. The current share price is $58, and the book value per share is $5. The company also has two bond issues outstanding. The first bond issue has a face value of $80 million, has a 7 percent coupon, and sells for 91 percent of par. The second issue has a face value of $64.64 million, has a 7 percent coupon, and sells for 94.1 percent of par. The first issue matures in 10 years, the second in 7 years.

a. What is the company's capital structure weight of equity on a book value basis?

b. What is the company's capital structure weight of debt on a book value basis?

c. What is the company's capital structure weight of equity on a market value basis?

d. What is the company's capital structure weight of debt on a market value basis?

Unilate’s required rate of return is 10%.

Assume that you are confident about the estimates of all the variables that affect the project’s cash flows except unit sales. If product acceptance is poor, sales would be only 75,000 units a year, whereas a strong consumer response would produce sales of 125,000 units. In either case, cash costs would still amount to 60% of revenues. You believe that there is a 25% chance of poor acceptance, a 25% chance of excellent acceptance, and a 50% chance of average acceptance (the base case).

(1) What is the worst-case NPV? The best-case NPV?

(2) Use the worst-case, most likely (or base) case, and best-case NPVs and probabilities of occurrence to find the project’s expected NPV, standard deviation (σ_NPV), and coefficient of variation (CV_NPV).

(3) Discuss how one would perform a sensitivity analysis on the unit sales, salvage value, and required rate of return for the project. Assume that each of these variables deviates from its base-case, or expected, value by plus and minus 10, 20, and 30%.

(4) How would you calculate the NPV, IRR, and the payback for each case?

2.   A small community currently taxes residents to provide monthly community concerts. Voter A currently pays a tax per concert equal to $50 per month. This voter receives a marginal benefit of $75 at the current political equilibrium number of concerts per month. Voter A:

a.    is the median voter.

b.   would be made better off if the number of monthly concerts were increased.

c.    would be made worse off if the number of monthly concerts were increased.

d.   has achieved his most-preferred political outcome for monthly concerts.

3.   If all voters have single-peaked preferences, then under majority rule:

a.    cycling of political outcomes can occur.

b.   a political equilibrium exists.

c.    the political equilibrium is the median most-preferred outcome.

d.   both (b) and (c)

4.   Voter A will normally vote in favor of one security guard per week because his marginal benefit is $125 and his tax share is $100 per week. Voter A receives zero marginal benefit from one concert a week and would vote against it. Voter B receives $125 marginal benefit from one concert per week but no marginal benefit from one security guard. One concert per week also will fail to gain a majority when put to the vote. Assuming that both Voter A and Voter B will pay $100 per week in tax for each concert and each security guard,

a.    they can both gain by engaging in logrolling on the two issues.

b.   pairing the issues on one ballot will result in both Voter A and Voter B voting in favor of the combined issue.

c.    pairing the issues on one ballot will result in both Voter A and Voter B voting against the com­bined issue.

d.   implicit logrolling will result in Voter A voting in favor of the combined issue, but in Voter B voting against it.

5.   If bureaucrats seek to maximize the size of their budgets, they will:

a.    seek to fund levels of services up to the point at which MSC = MSB.

b.   seek to fund levels of services for which TSB > TSC.

c.    seek to fund levels of services for which MSC > MSB.

d.   both (b) and (c)

6.   The demand curve for a pure public good is:

a.    obtained by adding the quantity demanded at each possible price for all consumers.

b.   obtained by summing the marginal benefits of each consumer for each possible quantity.

c.    always upward sloping.

d.   always a flat line.

7.   A voter’s most-preferred political outcome will be that for which the:

a.    marginal benefit of a pure public good is equal to the voter’s tax share per unit.

b.   total benefit per unit of a pure public good is equal to the voter’s tax share per unit.

c.    difference between the marginal benefit of a pure public good and the voter’s tax share per unit is maximized.

d.   marginal benefit of a pure public good is equal to zero, no matter what the voter’s tax share per unit.

13. If the quantity of good A is on the vertical axis and the quantity of good B is on the horizontal axis, the slope of the corresponding isocost line is:

a.    the price of good B divided by the price of good A.

b.   the negative of the price of good B divided by the price of good A.

c.    the price of good A divided by the price of good B.

d.   the negative of the price of good A divided by the price of good B.

14.   If the quantity of good A is on the vertical axis and the quantity of good B is on the horizontal axis, the marginal rate of technical substitution of the corresponding isoquant line is:

a.    the marginal product of good B divided by the marginal product of good A.

b.   the negative of the marginal product of good B divided by the marginal product of good A.

c.    the marginal product of good A divided by the marginal product of good B.

d.   the negative of the marginal product of good A divided by the marginal product of good B.

15.   If the quantity of good A is on the vertical axis and the quantity of good B is on the horizontal axis, then the cost-effective mix between the two goods occurs when:

a.    the slope of the associated isoquant line equals the price of A divided by the price of B.

b.   the marginal rate of technical substitution equals the price of A divided by the price of B.

c.    the marginal rate of technical substitution equals the price of B divided by the price of A.

d.   either (a) or (c).

Hillside issues $1,000,000 of 6%, 15-year bonds dated January 1, 2017, that pay interest semiannually on June 30 and December 31. The bonds are issued at a price of $1,223,995.

Required:

1. Prepare the January 1, 2017, journal entry to record the bonds’ issuance.
2(a) For each semiannual period, complete the table below to calculate the cash payment.
2(b) For each semiannual period, complete the table below to calculate the straight-line premium amortization.
2(c) For each semiannual period, complete the table below to calculate the bond interest expense.
3. Complete the below table to calculate the total bond interest expense to be recognized over the bonds' life.
4. Prepare the first two years of an amortization table using the straight-line method
5. Prepare the journal entries to record the first two interest payments.

Journal entry worksheet

Record the issue of bonds with a par value of $1,000,000 cash on January 1, 2017 at an issue price of $1,223,995.

Note: Enter debits before credits.