1. Company X has an equity market-to-book ratio of 1.4. Assuming the market valu
ID: 2697366 • Letter: 1
Question
1. Company X has an equity market-to-book ratio of 1.4. Assuming the market value equals its book value, what weights should it use for its WACC calculation? Assets= $1040, Debt=$500, Equity=$540.
a. The debt weight for the WACC calculation is ___%. (round to 2 decimal places)
b. The equity weight for the WACC calculation is ___%. (round to 2 decimal places)
2. Company Y has a $11.3 million debt issue outstanding, with a 5.8% coupon rate. The debt has semi-annul coupons, the next coupon is due in six months, and the debt matures in 5 years. It is currently priced at 93% of par value.
a. The pre-tax cost of debt is__% per year. (round to 4 decimal places)
b. If Company Y faces a 40% tax rate, the after-tax cost of debt is___%. (round to 4 decimal places)
3. CoffeeStop primarily sells coffee. It recently introduced premium coffee-flavored liquor. Suppose the firm faces a tax rate of 38% and collects the following information. If it plans to finance 10% of the new liquor-focused division with debt and the rest with equity, what WACC should it use for its liquor division? Assume a cost of debt of 5.2%, a risk-free rate of 3.7 %, and a risk-free premium of 6.4%.
CoffeeStop: Brown-Forman Liquors:
Beta=0.61 Beta=0.24
% Debt= 4% % Debt= 10%
%Equity= 96% % Equity=90%
The weighted average cost of capital is ____%. ( round to 2 decimal places)
4. Laurel, Inc. has debt outstanding with a coupon rate of 6.0% and a yield to maturity of 7.0% Its tax rate is 35%. Assume that the debt has annual coupons.
The effective after-tax cost of debt is ____%. (round to 4 decimal places)
5. Outstanding debt of Home Depot trades with a yield to maturity of 8%. The tax rate of Home Depot is 35%. What is the effective cost of debt of Home Depot?
a.5.8%
b.6.5%
c. 5.2 %
d. 6.2%
6. Your estimate of the market risk premium is 6%. The risk-free rate of return is 5% and General Motors has a beta of 1.2. What is General Motors
Explanation / Answer
1. Company X has an equity market-to-book ratio of 1.4. Assuming the market value equals its book value, what weights should it use for its WACC calculation? Assets= $1040, Debt=$500, Equity=$540. a. The debt weight for the WACC calculation is 48___%. (round to 2 decimal places) b. The equity weight for the WACC calculation is _52__%. (round to 2 decimal places) 2. Company Y has a $11.3 million debt issue outstanding, with a 5.8% coupon rate. The debt has semi-annul coupons, the next coupon is due in six months, and the debt matures in 5 years. It is currently priced at 93% of par value. a. The pre-tax cost of debt is__% per year. (round to 4 decimal places) b. If Company Y faces a 40% tax rate, the after-tax cost of debt is___%. (round to 4 decimal places) 3. CoffeeStop primarily sells coffee. It recently introduced premium coffee-flavored liquor. Suppose the firm faces a tax rate of 38% and collects the following information. If it plans to finance 10% of the new liquor-focused division with debt and the rest with equity, what WACC should it use for its liquor division? Assume a cost of debt of 5.2%, a risk-free rate of 3.7 %, and a risk-free premium of 6.4%. CoffeeStop: Brown-Forman Liquors: Beta=0.61 Beta=0.24 % Debt= 4% % Debt= 10% %Equity= 96% % Equity=90% The weighted average cost of capital is ____%. ( round to 2 decimal places) 4. Laurel, Inc. has debt outstanding with a coupon rate of 6.0% and a yield to maturity of 7.0% Its tax rate is 35%. Assume that the debt has annual coupons. The effective after-tax cost of debt is __4.55__%. (round to 4 decimal places) 5. Outstanding debt of Home Depot trades with a yield to maturity of 8%. The tax rate of Home Depot is 35%. What is the effective cost of debt of Home Depot? c. 5.2 % 6. Your estimate of the market risk premium is 6%. The risk-free rate of return is 5% and General Motors has a beta of 1.2. What is General Motors
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