Download Ch 14 Problems - U of L Class Index

Chapter 14
Problems
1- Suppose today is January 1, 2007; MAM Industries issued a 20-year bond with a
9% coupon and a $1,000 face value, payable on January 1, 2027. The bond now
sells for $915. Use this bond to determine the firm’s after-tax cost of debt.
Assume a 34% tax rate. (6.6%)
2- MAM Industries just declared a dividend of $3.50 per share of common stock.
The current stock price is $25 per share, and the dividend is expected to increase
at a rate of 4% per year for the foreseeable future. Use the dividends growth
model approach to compute the cost of equity capital. (18.56%)
3- MAM Industries has a preferred stock issue outstanding which pays an annual
dividend of $3.25 per share and currently has a market price of $25 per share.
Compute the cost of preferred stock. (13%)
4- Suppose MAM’s capital structure is 30% debt, 10% preferred stock, and 60%
equity. Using your answers from Questions 1 thru 3, compute the WACC.
(14.416%)
Use the following information to answer Questions 5 and 6
Margo Corporation is a major producer of lawn care equipment. Its stock currently sells
for $80 per share. There are 10.5 million shares outstanding. Margo also has debt
outstanding with a book value of $400 million. Margo bonds currently yield 10% and
trade at 90% of face value. The risk free rate is 8%, the market risk premium is 9%, and
Margo has a β equal to 2. The corporate tax rate is 34%.
5- Margo is considering expansion of its facilities. Use the SML to determine the
cost of equity. (26%)
6- Compute the weighted average cost of capital for Margo. (26%)