PNB Industries has 20 million shares of common stock outstanding with a market p

Question

PNB Industries has 20 million shares of common stock outstanding with a market price of $18 00 per share. The company also has outstanding preferred stock with a market value of $50 million, and 500,000 bonds outstanding, each with face value $1,000 and selling at 97% of par value. The cost of equity is 15%, the cost of preferred is 12%, and the cost of debt is 8.50%. If PNB's tax rate a 40%, what is the WACC? 7.05% 9.47% 11.31% 11.83% Suppose that Hanna Nails, Inc 's capital structure features 45 percent equity, 55 percent debt, and that its before-tar cost of debt a 5 percent, while its cost of equity is 9 percent. If the appropriate weighted average tax rate is 40 percent, what will be Hanna Nails' WACC? 5.11% 3.70% 6.80% 7.00% Compute the expected return given these three economic states, their likelihoods, and the potential returns 6.8% 12.8% 16.0% 22.7% In theory, this is a combination of securities that places the portfolio on the efficient frontier and on a line tangent from the risk-free rate. efficient market market portfolio probability distribution stock market bubble

Explanation / Answer

27. PNB Industries All Amounts in $ million Particulars Amount Cost Post Tax Weighted Cost Amount Common Stock 360 15% 15% 54 Preferred Stock 50 12% 12% 6 Bonds 485 8.50% 5.100% 24.735 Total 895 84.735 Thus, the WACC will be 84.735 million / 895 million = 9.47% 28. Hanna Nails, Inc. All Amounts in $ Particulars % Cost Post Tax Weighted Share Cost % Share Equity 45% 9% 9% 4.0500% Debt 55% 5% 3.00% 1.6500% WACC (calculated) 5.7000% 29. Expected Return given various probabilities Economic Probability Return Weighted State Return Fast Growth 0.1 50% 5.00% Slow Growth 0.6 8% 4.80% Recession 0.3 -10% -3.00% Total expected return 6.80% 30. In theory, efficient market is a combination of securities that places the portfolio on the efficient frontier and on a line tangent from the risk-free rate.

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