FIN400 FINAL EXAM 1. You have a portfolio with a beta of 3.1. What will be the new portfolio beta if you keep 85 percent of your money in the old portfolio and 15 percent in a stock with a beta of 4.5? Ans – 3.31 2. PNB Industries has 20 million shares of common stock outstanding with a market price of $18.00 per share. The company also has outstanding preferred stock with a market value of 50 million, and $500,000 bonds outstanding, each with face value $1,000 and selling at 97% of par value. The cost of equity is 15%, the cost of preferred is 12% and the cost of debt is 8.50%. If PNB’s tax rate is 40%, what is the WACC? Ans – 9.47% 3. A 2 – year Treasury security currently earns 5.13%. Over the next 2 years, the real …show more content…
Calculate the bond’s default risk premium. Ans – 2.10% 21. Universal Forests current stock price is $154.00 and it is likely to pay a $5.23 dividend next year. Since analysts estimate Universal Forest will have a 13.0% growth rate what is the required return? Ans – 16.40% 22. Suppose that Hanna Nails, Inc capital structure features 45 percent equity, 55 percent debt, and that it’s before tax cost of debt is 5%, while its cost of equity is 9 percent. If the appropriate weighted average tax rate is 40 percent, What will be Hanna Nails’ WACC? Ans – 5.70% 23. Ivy has preferred stock selling for 98 percent of par that pays a 7 percent annual coupon. What would Ivy’s component cost of preferred stock ? Ans – 7.14% 24. What is the taxable equivalent yield on a municipal bond with a yield to maturity of 4% for an investor in the 28% tax bracket? Ans – 5.56% 25. Which of the following is a poor justification for a merger? Ans – Increase the size of the firm 26. A financial manager has detrermined that the appropriate rate discount for a foreign project is 17 percent. However, that discount rate applies in the United States using dollars. What discount rate should be used in the foreign country using the foreign currency? The inflation rate in the United States and in the foreign country is expected to be 3 percent and 8 percent, respectively. Ans – 22% 27. Jane Adams invests all her money in the stock
Then we can use the following formula to calculate the WACC. The cost of debt is taken to be on an after tax basis to further to account for the depreciation tax shield.
The comptroller currently finds the weights for the weighted average cost of capital (WACC) from information from the balance sheet shown in Table 2. Compute the book value weights that the comptroller currently uses for the company’s capital structure.
What is each bond’s expected price after one year, assuming they both have a YTM of 8.50%?
WACC= (%of debt) (after-tax cost of debt) + (% of preferred stock)(Cost of preferred stock) + (% of common equity) (Cost of common equity)
2. If you had a payment that was due you in 5 years for $50,000 and you could earn a 5% rate of return, how much
1. Determine the Weighted Average Cost of Capital (WACC) based on using retained earnings in the capital structure.
Lastly, the interest rate was calculated by dividing interest expense by long-term debt for the company. These numbers, along with equity and debt data given to us in the case, resulted in a WACC of 13.89%.
So, the 20 year corporate bond interest rate associated with the company’s rating is 3.86.
WACC = (1-corporate tax rate)(Pretax rate of cost of debt)(Market value of debt/ D+E))+ After tax rate of cost of equity(market value of equity/D+E))
Thus the WAVG Cost of Debt (including L/T debt and preferred stock) = rd = 8.633%
4) Calculate the WACCs for Coca-Cola and PepsiCo. Assume a tax rate of 35%. Be clear
With all the above aspects considered, Adecco arrived at a debt portion of WACC equal to .96% and an equity portion of 9.31% resulting in an overall WACC of 10.27%. This was calculated utilizing a beta of equity considering a beta of debt and assets of 0.2 and 0.48 respectively. Utilizing the free cash
Using CAPM: Risk Free Rate = 6%; Market Risk Premium = 5%; Beta = 1.2