A BlockOut Co. has 76,554 bonds outstanding that are selling at par value. The b

Question

A

BlockOut Co. has 76,554 bonds outstanding that are selling at par value. The bonds yield 8.5 percent. The company also has 4.4 million shares of common stock outstanding. The stock has a beta of 1.23 and sells for $42.9 a share. The U.S. Treasury bill is yielding 4 percent and the market risk premium is 7.2 percent. Blackout's tax rate is 37 percent. What is the firm's weighted average cost of capital? (Enter answer in percents.)

B

Dominosa, Inc. wants to have a weighted average cost of capital of 7.1 percent. The firm has an aftertax cost of debt of 5.2 percent and a cost of equity of 10.2 percent. What debt-equity ratio is needed for the firm to achieve their targeted weighted average cost of capital?

C

GIMP Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 2 years to maturity that is quoted at 108.6 percent of face value. The issue makes annual payments and has an embedded cost (coupon rate) of 8.7 percent annually. What is the firm's pretax cost of debt? (Enter answer in percents.)

Explanation / Answer

Solution.

B.

7.1 = 5.2 (D/V) + 10.2(E/V)

7.1 = 5.2 (D/V) + 10.2 ((V-D)/V)

7.1V = 5.2 D + 10.20 V – 10.20 D

-3.1V = -5D

5(D/V) = 3 D/V = 3/5

If D = 3, and V = 5 then E must equal 2 (5-3)

D/E = 2/3, or 0..66

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