1.  Ajax Inc.'s semi-annual bonds have a price of $850, an 9.80% coupon rate and mature in 18 years. The company's tax rate is 38%. What is its after-tax cost of debt when calculating its WACC? 

 

2. Given the following information, what is the value of XYZ Corporation (in $ millions)?

Common Stock: 12.30 million shares outstanding with a $10 par value. Market price is $45.20/share.

Bond Issue 1: $490 million face value, currently selling for 105% of par value.

Bond Issue 2: $170 million total face value, each bond is selling for $920 per $1,000 face value. 

(note: Value V = D + E +P)

 

3.  The market value of Roslin Ltd.'s debt is $250 million and the market value of the firm’s equity is $220 million. The cost of equity is 19.60%, the pre-tax cost of debt is 9.40%, and the tax rate is 30%. The firm is evaluating a project that has the same risk as the firm’s existing operations. The new project will cost $3 million initially, but will generate cash inflows of $800,000 per year for 10 years. Should the firm go ahead with the project?

 

4.  A firm's WACC is can be used to discount the cash flows of projects that:

A) Are subsidized by the government

B) Are similar in risk to the current operations of the firm

C) Represent completely new avenues of business for the firm

D) Payback within the required period of time

E) Have no expenses at the end of the project

 

5. A company’s pre-tax cost of debt when calculating its WACC 

A) Will generally be higher than its cost of equity

B) Will generally be higher than the cost of preferred financing

C) Can be calculated using the dividend discount model

D) Can be determined from its dividend payout policy and the firm’s tax rate

E) Will be a function of the yield to maturity on similar debt in the marketplace

Answer rating: 100% (QA)

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