04 Jun Question 1. You were hired as a consultant to ABC Company, w
Question
1. You were hired as a consultant to ABC Company, whose target capital structure is 35% debt, 15% preferred, and 50% common equity. The before-tax cost of debt is 6.50%, the yield on the preferred is 6.00%, the cost of common stock is 11.25%, and the tax rate is 40%. What is the WACC?
2. If the market value of debt is $155,527, market value of preferred stock is $78,829, and market value of common equity is 312,100, what is the weight of preferred stock?
3. The 8 percent annual coupon bonds of the ABC Co. are selling for $880.76. The bonds mature in 10 years. The bonds have a par value of $1,000 and payments are made semi-annually? What is the before-tax cost of debt?
4.ABC Industries will pay a dividend of $2 next year on their common stock. The company predicts that the dividend will increase by 7 percent each year indefinitely. What is the dividend yield if the stock is selling for $33 a share?
5. The 7 percent annual coupon bonds of the ABC Co. are selling for $950.41. The bonds mature in 8 years. The bonds have a par value of $1,000 and payments are made semi-annually. If the tax rate is 35%, what is the after-tax cost of debt?
6. ABC, Inc., has 113 shares of common stock outstanding at a price of $97 a share. They also have 397 shares of preferred stock outstanding at a price of $54 a share. There are 414, 8 percent bonds outstanding that are priced at $33. The bonds mature in 16 years and pay interest semiannually. What is the capital structure weight of the preferred stock?
7. The 8 percent annual coupon bonds of the ABC Co. are selling for $1,080.69. The bonds mature in 10 years. The bonds have a par value of $1,000. What is the before-tax cost of debt?
8. Several years ago, the ABC Company sold a $1,000 par value bond that now has 20 years to maturity and a 7.00% annual coupon that is paid semiannually. The bond currently sells for $925 and the company’s tax rate is 40%. What is the after-tax cost of debt?
9. The 8.5 percent annual coupon bonds of the ABC Co. are selling for $1,179. The bonds mature in 12 years. The bonds have a par value of $1,000. If the tax rate is 30%, what is the after-tax cost of debt?
10. ABC Inc.’s perpetual preferred stock sells for $58.1 per share, and it pays an $6.7 annual dividend. If the company were to sell a new preferred issue, it would incur a flotation cost of $4 per share. What is the company’s cost of preferred stock for use in calculating the WACC?
11. The before-tax cost of debt is 6 percent. What is the after-tax cost of debt if the tax rate is 41 percent?
12. The ABC Company has a cost of equity of 23.8 percent, a pre-tax cost of debt of 5 percent, and a tax rate of 31 percent. What is the firm’s weighted average cost of capital if the proportion of debt is 39.9%?
13. ABC Industries will pay a dividend of $2 next year on their common stock. The company predicts that the dividend will increase by 6 percent each year indefinitely. What is the firm’s cost of equity if the stock is selling for $33 a share?
14. If the market value of debt is $128,737, market value of preferred stock is $68,840, and market value of common equity is 200,589, what is the weight of common equity?
15. ABC’s last dividend paid was $2.6, its required return is 16%, its growth rate is 3.7%, and its growth rate is expected to be constant in the future. What is Sorenson’s expected stock price in 7 years, i.e., what is P7?
16. If D1 = $4.26, g (which is constant) = 2%, and P0 = $67.54, what is the stock’s expected dividend yield for the coming year?
17. A stock is expected to pay a dividend of $2.4 at the end of the year. The required rate of return is rs = 11.4%, and the expected constant growth rate is g = 7.5%. What is the stock’s current price?
18. A stock’s next dividend is expected to be $1.8. The required rate of return on stock is 16.3%, and the expected constant growth rate is 7.6%. What is the stock’s current price?
19. If D1 = $2.1, g (which is constant) = 2.4%, and P0 = $60.5, what is the stock’s expected total return for the coming year?
20. A stock just paid a dividend of $0.6. The required rate of return is 11%, and the constant growth rate is 3.9%. What is the current stock price?
21. ABC just paid a dividend of D0 = $4. Analysts expect the company’s dividend to grow by 33% this year, by 28% in Year 2, and at a constant rate of 6% in Year 3 and thereafter. The required return on this stock is 17%. What is the best estimate of the stock’s current market value?
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