5.

1. The basic WACC equation Aa Aa The calculation of WACC involves calculating the weighted average of the required rates of return on debt and equity, where the weights equal the percentage of each type of financing in the firm's overall capital structure. is the symbol that represents the before-tax cost of debt in the weighted average cost of capital (WACC) equation. Mitchell Co. has $1.4 million of debt, $2.5 million of preferred stock, and $3.3 million of common equity. What would be its weight on debt? 0 0.39 0.19 O 0.46 0.35 3. Cost of debt Aa Aa The is the interest rate that a firm pays on any new debt financing. Andalusian Limited (AL) can borrow funds at an interest rate of 7.30% for a period of four years. Its marginal federal-plus-state tax rate is 40%. AL's after-tax cost of debt is (rounded to two decimal places) At the present time, Andalusian Limited (AL) has 10-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have a current market price of $1,278.41 per bond, carry a coupon rate of 11%, and distribute annual coupon payments. The company incurs a federal-plus-state tax rate of 40%. If AL wants to issue new debt, what would be a reasonable estimate for its after-tax cost of debt (rounded to two decimal places)? 0 3.80% 5.06% o 4.85% 4.22% 4. Cost of preferred stock a Aa Preferred stock is a hybrid security, because it has some characteristics typical of debt and others typical of equity. The following table lists various characteristics of preferred stock. Determine which of these characteristics is consistent with debt and which is consistent with equity. Characteristics Has a par, or face, value. Usually has no specified maturity date. Debt Equity Consider the case of Galbraith Enterprises: At the present time, Galbraith Enterprises does not have any preferred stock outstanding but is looking to include preferred stock in its capital structure in the future. Galbraith has found some institutional investors that are willing to purchase its preferred stock issue provided that it pays a perpetual dividend of $12 per share. If the investors pay $98.90 per share for their investment, then Galbraith's cost of preferred stock (rounded to four decimal places) will be The cost of equity using the CAPM approach The current risk-free rate of return (rRF) is 4.23%, while the market risk premium is 6.17%. the Roosevelt Company has a beta of 0.92. Using the Capital Asset Pricing Model (CAPM) approach, Roosevelt's cost of equity is The cost of equity using the bond yield plus risk premium approach The Adams Company is closely held and, therefore, cannot generate reliable inputs with which to use the CAPM method for estimating a company's cost of internal equity. Adams's bonds yield 10.28%, and the firm's analysts estimate that the firm's risk premium on its stock over its bonds is 4.95%. Based on the bond-yield-plus-risk-premium approach, Adams's cost of internal equity is: 18.28% 15.23% 19.04% 14.47% The cost of equity using the discounted cashflow (or dividend growth) approach Tyler Enterprises's stock is currently selling for $45.56 per share, and the firm expects its per-share dividend to be $2.35 in one year. Analysts project the firm's growth rate to be constant at 5.72%. Using the cost of equity using the discounted cashflow (or dividend growth) approach, what is Tyler's cost of internal equity? 14.69% 11.42% 10.88% 10.34% Estimating growth rates It is often difficult to estimate the expected future dividend growth rate for use in estimating the cost of existing equity using the DCF or DG approach. In general, there are three available methods to generate such an estimate: Carry forward a historical realized growth rate, and apply it to the future. Locate and apply an expected future growth rate prepared and published by security analysts. Use the retention growth model Suppose Tyler is currently distributing 50.00 of its earnings in the form of cash dividends. It has also historically generated an average return on equity (ROE) of 18.00. Tyler's estimated growth rate is 6. Cost of new common stock Aa Aa True or False: The following statement accurately describes how firms make decisions related to issuing new common stock. Taking flotation costs into account will reduce the cost of new common stock. True: Taking flotation costs into account will reduce the cost of new common stock, because you will multiply the cost of new common stock by 1 minus the flotation cost-similar to how the after-tax cost of debt is calculated. O False: Flotation costs are additional costs associated with raising new common stock. Sunny Day Manufacturing Company is considering investing in a one-year project that requires an initial investment of $475,000. To do so, it will have issue new common stock and will incur a flotation cost of 2.00%. At the end of the year, the project is expected to produce a cash inflow of $595,000. The rate of return that Sunny Day expects to earn on its project (net of its flotation costs) is (rounded to two decimal places). White Lion Homebuilders has a current stock price of $22.35 per share, and is expected to pay a per-share dividend of $2.45 at the end of next year. The company's earnings and dividends' growth rate are expected to grow at the constant rate of 8.70% into the foreseeable future. If white Lion expects to incur flotation costs of 5.00% of the value of its newly-raised equity funds, then the flotation-adjusted (net) cost of its new common stock (rounded to two decimal places) should be Sunny Day Manufacturing Company Co.'s addition to earnings for this year is expected to be $745,000. Its target capital structure consists of 50% debt, 5% preferred, and 45% equity. Determine Sunny Day Manufacturing Company's retained earnings breakpoint: o $1,738,334 o $1,655,556 O $1,821,112 $1,490,000