Question;62. Phillips Equipment has 80,000 bonds outstanding;that are selling at par. Bonds with similar characteristics are yielding 6.75;percent. The company also has 750,000 shares of 7 percent preferred stock and;2.5 million shares of common stock outstanding. The preferred stock sells for;$53 a share. The common stock has a beta of 1.34 and sells for $42 a share. The;U.S. Treasury bill is yielding 2.8 percent and the return on the market is 11.2;percent. The corporate tax rate is 38 percent. What is the firm's weighted;average cost of capital?;A. 10.39 percent;B. 10.64 percent;C. 11.18 percent;D. 11.30 percent;E. 11.56 percent;63. Wayco Industrial Supply has a pre-tax cost of debt;of 7.6 percent, a cost of equity of 14.3 percent, and a cost of preferred stock;of 8.5 percent. The firm has 220,000 shares of common stock outstanding at a;market price of $27 a share. There are 25,000 shares of preferred stock;outstanding at a market price of $41 a share. The bond issue has a face value;of $550,000 and a market quote of 101.2. The company's tax rate is 37 percent.;What is the firm's weighted average cost of capital?;A. 10.18 percent;B. 10.84 percent;C. 11.32 percent;D. 12.60 percent;E. 12.81 percent;64. Central Systems, Inc. desires a weighted average;cost of capital of 8 percent. The firm has an aftertax cost of debt of 4.8;percent and a cost of equity of 15.2 percent. What debt-equity ratio is needed;for the firm to achieve its targeted weighted average cost of capital?;A. 0.38;B. 0.44;C. 1.02;D. 2.25;E. 2.63;65. R.S. Green has 250,000 shares of common stock;outstanding at a market price of $28 a share. Next year's annual dividend is;expected to be $1.55 a share. The dividend growth rate is 2 percent. The firm;also has 7,500 bonds outstanding with a face value of $1,000 per bond. The;bonds carry a 7 percent coupon, pay interest semiannually, and mature in 7.5;years. The bonds are selling at 98 percent of face value. The company's tax;rate is 34 percent. What is the firm's weighted average cost of capital?;A. 5.4 percent;B. 6.2 percent;C. 7.5 percent;D. 8.5 percent;E. 9.6 percent;66. Kelso's has a debt-equity ratio of 0.55 and a tax;rate of 35 percent. The firm does not issue preferred stock. The cost of equity;is 14.5 percent and the aftertax cost of debt is 4.8 percent. What is the;weighted average cost of capital?;A. 10.46 percent;B. 10.67 percent;C. 11.06 percent;D. 11.38 percent;E. 11.57 percent;67. Granite Works maintains a debt-equity ratio of;0.65 and has a tax rate of 32 percent. The firm does not issue preferred stock.;The pre-tax cost of debt is 9.8 percent. There are 25,000 shares of stock;outstanding with a beta of 1.2 and a market price of $19 a share. The current;market risk premium is 8.5 percent and the current risk-free rate is 3.6 percent.;This year, the firm paid an annual dividend of $1.10 a share and expects to;increase that amount by 2 percent each year. Using an average expected cost of;equity, what is the weighted average cost of capital?;A. 8.44 percent;B. 8.78 percent;C. 8.96 percent;D. 9.13 percent;E. 9.20 percent;68. Delta Lighting has 30,000 shares of common stock;outstanding at a market price of $17.50 a share. This stock was originally;issued at $31 per share. The firm also has a bond issue outstanding with a;total face value of $280,000 which is selling for 86 percent of par. The cost;of equity is 16 percent while the aftertax cost of debt is 6.9 percent. The;firm has a beta of 1.48 and a tax rate of 30 percent. What is the weighted;average cost of capital?;A. 11.07 percent;B. 13.14 percent;C. 14.36 percent;D. 15.29 percent;E. 15.47 percent;69. The Market Outlet has a beta of 1.38 and a cost of;equity of 14.945 percent. The risk-free rate of return is 4.25 percent. What;discount rate should the firm assign to a new project that has a beta of;1.25?;A. 13.54 percent.;B. 13.72 percent.;C. 13.94 percent.;D. 14.14 percent.;E. 14.36 percent.;70. Silo Mills has a beta of 0.87 and a cost of equity;of 11.9 percent. The risk-free rate of return is 2.8 percent. The firm is;currently considering a project that has a beta of 1.03 and a project life of 6;years. What discount rate should be assigned to this project?;A. 13.33 percent.;B. 13.57 percent.;C. 13.62 percent.;D. 13.84 percent.;E. 14.09 percent.;71. Travis & Sons has a capital structure which is;based on 40 percent debt, 5 percent preferred stock, and 55 percent common;stock. The pre-tax cost of debt is 7.5 percent, the cost of preferred is 9;percent, and the cost of common stock is 13 percent. The company's tax rate is;39 percent. The company is considering a project that is equally as risky as;the overall firm. This project has initial costs of $325,000 and annual cash;inflows of $87,000, $279,000, and $116,000 over the next three years;respectively. What is the projected net present value of this project?;A. $68,211.04;B. $68,879.97;C. $69,361.08;D. $74,208.18;E. $76,011.23;72. Panelli's is analyzing a project with an initial;cost of $102,000 and cash inflows of $65,000 in year one and $74,000 in year;two. This project is an extension of the firm's current operations and thus is;equally as risky as the current firm. The firm uses only debt and common stock;to finance its operations and maintains a debt-equity ratio of 0.45. The;aftertax cost of debt is 4.8 percent, the cost of equity is 12.7 percent, and;the tax rate is 35 percent. What is the projected net present value of this;project?;A. $15,411;B. $15,809;C. $16,333;D. $16,938;E. $17,840;73. Carson Electronics uses 70 percent common stock;and 30 percent debt to finance its operations. The aftertax cost of debt is 5.4;percent and the cost of equity is 15.4 percent. Management is considering a;project that will produce a cash inflow of $36,000 in the first year. The cash;inflows will then grow at 3 percent per year forever. What is the maximum;amount the firm can initially invest in this project to avoid a negative net;present value for the project?;A. $299,032;B. $382,979;C. $411,406;D. $434,086;E. $441,414;74. The Bakery is considering a new project it;considers to be a little riskier than its current operations. Thus, management;has decided to add an additional 1.5 percent to the company's overall cost of;capital when evaluating this project. The project has an initial cash outlay of;$62,000 and projected cash inflows of $17,000 in year one, $28,000 in year two;and $30,000 in year three. The firm uses 25 percent debt and 75 percent common;stock as its capital structure. The company's cost of equity is 15.5 percent;while the aftertax cost of debt for the firm is 6.1 percent. What is the;projected net present value of the new project?;A. -$6,208;B. -$5,964;C. -$2,308;D. $1,427;E. $1,573;75. The Oil Derrick has an overall cost of equity of;13.6 percent and a beta of 1.28. The firm is financed solely with common stock.;The risk-free rate of return is 3.4 percent. What is an appropriate cost of;capital for a division within the firm that has an estimated beta of;1.18?;A. 12.37 percent;B. 12.41 percent;C. 12.54 percent;D. 12.67 percent;E. 12.80 percent;76. Miller Sisters has an overall beta of 0.64 and a;cost of equity of 11.2 percent for the firm overall. The firm is 100 percent;financed with common stock. Division A within the firm has an estimated beta of;1.08 and is the riskiest of all of the firm's operations. What is an;appropriate cost of capital for division A if the market risk premium is 9.5;percent?;A. 15.12 percent;B. 15.38 percent;C. 15.63 percent;D. 15.77 percent;E. 16.01 percent;77. Deep Mining and Precious Metals are separate firms;that are both considering a silver exploration project. Deep Mining is in the;actual mining business and has an aftertax cost of capital of 12.8 percent.;Precious Metals is in the precious gem retail business and has an aftertax cost;of capital of 10.6 percent. The project under consideration has initial costs;of $575,000 and anticipated annual cash inflows of $102,000 a year for ten;years. Which firm(s), if either, should accept this project?;A. Company A only;B. Company B only;C. both Company A and Company B;D. neither Company A or Company B;E. cannot be determined without further information;78. Sister Pools sells outdoor swimming pools and;currently has an aftertax cost of capital of 11.6 percent. Al's Construction;builds and sells water features and fountains and has an aftertax cost of;capital of 10.8 percent. Sister Pools is considering building and selling its;own water features and fountains. The sales manager of Sister Pools estimates;that the water features and fountains would produce 20 percent of the firm's;future total sales. The initial cash outlay for this project would be $85,000.;The expected net cash inflows are $16,000 a year for 7 years. What is the net;present value of the Sister Pools project?;A. -$11,044;B. -$9,115;C. -$7,262;D. -$4,508;E. $1,219;79. Decker's is a chain of furniture retail stores.;Furniture Fashions is a furniture maker and a supplier to Decker's. Decker's;has a beta of 1.38 as compared to Furniture Fashion's beta of 1.12. The;risk-free rate of return is 3.5 percent and the market risk premium is 8;percent. What discount rate should Decker's use if it considers a project that;involves the manufacturing of furniture?;A. 12.46 percent;B. 12.92 percent;C. 13.50 percent;D. 14.08 percent;E. 14.54 percent;80. Bleakly Enterprises has a capital structure of 55;percent common stock, 10 percent preferred stock, and 35 percent debt. The;flotation costs are 4.5 percent for debt, 7 percent for preferred stock, and;9.5 percent for common stock. The corporate tax rate is 34 percent. What is the;weighted average flotation cost?;A. 5.8 percent;B. 6.2 percent;C. 6.7 percent;D. 7.0 percent;E. 7.5 percent;81. Justice, Inc. has a capital structure which is;based on 30 percent debt, 5 percent preferred stock, and 65 percent common;stock. The flotation costs are 11 percent for common stock, 10 percent for;preferred stock, and 7 percent for debt. The corporate tax rate is 37 percent.;What is the weighted average flotation cost?;A. 8.97 percent;B. 9.48 percent;C. 9.62 percent;D. 9.75 percent;E. 10.00 percent;82. The Daily Brew has a debt-equity ratio of 0.72.;The firm is analyzing a new project which requires an initial cash outlay of;$420,000 for equipment. The flotation cost is 9.6 percent for equity and 5.4;percent for debt. What is the initial cost of the project including the;flotation costs?;A. $302,400;B. $368,924;C. $455,738;D. $456,400;E. $583,333;83. You are evaluating a project which requires;$230,000 in external financing. The flotation cost of equity is 11.6 percent;and the flotation cost of debt is 5.4 percent. What is the initial cost of the;project including the flotation costs if you maintain a debt-equity ratio of;0.45?;A. $248,494;B. $249,021;C. $254,638;D. $255,551;E. $255,646;84. Western Wear is considering a project that;requires an initial investment of $274,000. The firm maintains a debt-equity;ratio of 0.40 and has a flotation cost of debt of 7 percent and a flotation;cost of equity of 10.5 percent. The firm has sufficient internally generated;equity to cover the equity portion of this project. What is the initial cost of;the project including the flotation costs?;A. $279,592;B. $281,406;C. $288,005;D. $297,747;E. $302,762;85. Yesteryear Productions is considering a project;with an initial start up cost of $960,000. The firm maintains a debt-equity;ratio of 0.50 and has a flotation cost of debt of 6.8 percent and a flotation;cost of equity of 11.4 percent. The firm has sufficient internally generated;equity to cover the equity cost of this project. What is the initial cost of;the project including the flotation costs?;A. $979,417;B. $982,265;C. $992,386;D. $1,038,513;E. $1,065,089;Essay;Questions;86. What role does the weighted average cost of;capital play when determining a project's cost of capital?;87. What are some advantages of the subjective;approach to determining the cost of capital and why do you think that approach;is utilized?;88. Give an example of a situation where a firm should;adopt the pure play approach for determining the cost of capital for a;project.;89. Suppose your boss comes to you and asks you to;re-evaluate a capital budgeting project. The first evaluation was in error, he;explains, because it ignored flotation costs. To correct for this, he asks you;to evaluate the project using a higher cost of capital which incorporates these;costs. Is your boss' approach correct? Why or why not?;90. Explain how the use of internal equity rather than;external equity affects the analysis of a project.
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