29 Jun Question [1]. Financial analysts for N
Question
[1]. Financial analysts for Naulls Industries have revealed the following information about the company:
· Naulls Industries currently has a capital structure that consists of 75 percent common equity and 25 percent debt.
· The risk-free rate, kRF, is 5 percent.
· The market risk premium , kM – kRF, is 6 percent.
· Naulls’s common stock has a beta of 1.2.
· Naulls has 20-year bonds outstanding with an annual coupon rate of 12 percent and a face value of $1,000. The bonds sell today for $1,200.
· The company’s tax rate is 40 percent.
What is the company’s current WACC?
a. 7.41%
b. 9.17%
c.10.61%
d.10.99%
e.11.57%
[2]. Grateway Inc. has a weighted average cost of capital of 11.5 percent. Its target capital structure is 55 percent equity and 45 percent debt. The company has sufficient retained earnings to fund the equity portion of its capital budget. The before-tax cost of debt is 9 percent, and the company’s tax rate is 30 percent. If the expected dividend next period (D1) is $5 and the current stock price is $45, what is the company’s growth rate?
a.2.68%
b.3.44%
c.4.64%
d.6.75%
e.8.16%
Answer: e :
[3]. The managers of Kenforest Grocers are trying to determine the company’s optimal capital budget for the upcoming year. Kenforest is considering the following projects:
Rate of
Project Size Return Risk
A $200,000 16% High
B 500,000 14 Average
C 400,000 12 Low
D 300,000 11 High
E 100,000 10 Average
F 200,000 10 Low
G 400,000 7 Low
The company estimates that its WACC is 11 percent. All projects are independent. The company adjusts for risk by adding 2 percentage points to the WACC for high-risk projects and subtracting 2 percentage points from the WACC for low-risk projects. Which of the projects will the company accept?
a.A, B, C, E, F
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