(10-19) 1.Suppose that TNT, Inc. has a capital structure of 43 percent equity, 2

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(10-19)

1.Suppose that TNT, Inc. has a capital structure of 43 percent equity, 23 percent preferred stock, and 34 percent debt. If the before-tax component costs of equity, preferred stock and debt are 15.4 percent, 10 percent and 7 percent, respectively, what is TNT's WACC if the firm faces an average tax rate of 28%?

2.Accessory Industries has 2 million shares of common stock outstanding, 1 million shares of preferred stock outstanding, and 100 thousand bonds. If the common shares are selling for $22 per share, the preferred shares are selling for $10.50 per share, and the bonds are selling for 96 percent of par ($1000), what would be the weights used in the calculation of Accessory's WACC for common stock, preferred stock, and bonds, respectively?

3.Suppose that Tan Lines' common shares sell for $20 per share, are expected to set their next annual dividend at $1.00 per share, and that all future dividends are expected to grow by 5 percent per year, indefinitely. If Tan Lines faces a flotation cost of 10% on new equity issues, what will be the flotation-adjusted cost of equity?

4.Suppose that Tan Lotion's common shares sell for $18 per share, are expected to set their next annual dividend at $1.00 per share, and that all future dividends are expected to grow by 7 percent per year, indefinitely. If Tan Lotion faces a flotation cost of 12% on new equity issues, what will be the flotation-adjusted cost of equity?

5.A firm has 1,000,000 shares of common stock outstanding, each with a market price of $10.00 per share. It has 15,000 bonds outstanding, each selling for $900 (with a face value of $1,000). The bonds mature in 15 years, have a coupon rate of 10%, and pay coupons semi-annually. The firm's equity has a beta of 1.5, and the expected market return is 20%. The tax rate is 35% and the WACC is 16%. What is the risk-free rate?

6.Diddy Corp stock has a beta of 1.0, the current risk-free rate is 5%, and the expected return on the market is 15.5%. What is Diddy's cost of equity?

7.KatyDid Clothes has a $150 million ($1000 face value) 15-year bond issue selling for 106% of par that carries a coupon rate of 8%, paid semi-annually. What would be KatyDid's before-tax component cost of debt?

8.FarCry Industries, a maker of telecommunications equipment, has 6 million shares of common stock outstanding, 1 million shares of preferred stock outstanding, and 10 thousand bonds. If the common shares are selling for $27 per share, the preferred shares are selling for $15 per share, and the bonds are selling for 119% of par ($1000), what weight should you use for debt in the computation of FarCry's WACC?

9.TAFKAP Industries has 8 million shares of stock outstanding selling at $17 per share and an issue of $20 million in 7.5%, annual coupon bonds with a maturity of 15 years, selling at 109% of par ($1000). If TAFKAP's weighted average tax rate is 34% and its cost of equity is 12.5%, what is TAFKAP's WACC?

12.83%

Explanation / Answer

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