Washington State University Finance 325
33.
Gail’s Dance Studio is currently an all equity firm that has 80,000 shares of stock
outstanding with a market price of $42 a share. The current cost of equity is 12 percent and the tax rate is 34 percent. Gail is considering adding $1 million of debt with a coupon rate of 8 percent to her capital structure. The debt will be sold at par value. What is the levered value of the equity?
Wild Flowers Express has a debt-equity ratio of .60. The pre-tax cost of debt is 9 percent while the unlevered cost of capital is 14 percent. What is the cost of equity if the tax rate is 34 percent?
Your firm has a $250,000 bond issue outstanding. These bonds have a 7 percent coupon, pay interest semiannually, and have a current market price equal to 103 percent of face value. What is the amount of the annual interest tax shield given a tax rate of 35 percent? Bertha’s Boutique has 2,000 bonds outstanding with a face value of $1,000 each and a coupon rate of 9 percent. The interest is paid semi-annually. What is the amount of the annual interest tax shield if the tax rate is 34 percent?
Your firm has expected earnings before interest and taxes of $1,600. Your unlevered cost of capital is 13 percent and your tax rate is 34 percent. You have debt with both a book and a face value of $2,500. This debt has an 8 percent coupon and pays interest annually. What is your weighted average cost of capital?
A firm has debt of $5,000, equity of $16,000, a leveraged value of $8,900, a cost of debt of 8 percent, a cost of equity of 12 percent, and a tax rate of 34 percent. What is the firm’s weighted average cost of capital?
34.
35.
36.
37.
38.
5
Washington State University Finance 325
(Answer Keys)
1. $41.80 2. $36.00 3. $2.80 4. $29.17 5. 6.3 percent 6. $76.97 7. $3.15 8. $5.25 9. $11.67 10. $0 11. $543
12. 7.30 percent 13. 6.00 percent
14. Stock A; because it has a higher expected return and appears to be less risky than stock B. 15. 6.77 percent 16. 6.8 percent 17. 8.25 percent 18. .004056 19. 2.6 percent 20. 1.60 21. .33
22. 6.4 percent 23. 14.24 percent 24. 1.68 25. C
26. 39 percent 27. 48 percent 28. 10.38 percent 29. 9.14 percent 30. $20.0 million 31. $16.0 million 32. $10,852 33. $2.7 million 34. 15.98 percent 35. $6,125 36. $61,200
37. 11.77 percent 38. 10.40 percent
6
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