8. The Downtowner has 950,000 shares of common stock outstanding valued at $38 a

Question

8. The Downtowner has 950,000 shares of common stock outstanding valued at $38 a share along with 40,000 bonds selling for $1,020 each. What weight should be given to the debt when the firm computes its weighted average cost of capital? a. 46.67 percent b. 53.06 percent c. 55.05 percent d. 48.27 percent e. 51.79 percent The Market Outlet is an all-equity financed firm with a beta of 1.38 and a cost of equity of 5 percent. The risk-free rate of return is 4.25 percent. What discount rate should the firm 9. assign to a new project that has a beta of 1.25? a. 13.54 percent b. 13.72 percent c. 13.94 percent d. 14.14 percent c. 14.36 percent 10. Street Corporation's common stock has a beta of 1.27. The risk-free rate is 3,.2 percent and the expected return on the market is 12.68 percent. What is the firm's cost of equity? a. 12.84 percent b. 15.24 percent c. 17.67 percent d. 19.30 percent e. 21.50 percent

Explanation / Answer

Question 8:

Market value of Equity = 950,000 * 38

Market value of Equity = 36,100,000

Market value of Debt = 40,000 * 1,020

Market value of Debt = 40,800,000

Weight of Debt = 40,800,000/ (40,800,000 + 36,100,000)

Weight of Debt = 53.06%

Option B is correct

Question 9:

First we will find return on market:

14.945% = 4.25% + 1.38 * (Return on Market - 4.25%)

Return on Market = 12%

Now we find required return on the project:

Required return = 4.25% + 1.25 * (12% - 4.25%)

Required return = 13.94%

Option C is correct

Question 10:

Risk Free Rate = 3.2%

Market return = 12.68%

Beta = 1.27

Required return = 3.2% + 1.27 * (12.68% - 3.2%)

Required return = 15.24%

Option B is correct

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