# Consider the following bond issues: Bond A: 5% 15-year bond Bond B: 5% 30-year bond Neither bond has an embedded option. Both bonds are trading in the market at the same yield. Which bond will ﬂuctuate more in price when interest rates change? Why

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13)The company cost of capital may be an inappropriate discount rate for a capital budgeting proposal if ? the proposal has a different degree of risk. (ch13) 1) The company cost of capital for a firm with a 65/35 debt/equity split, 8% before-tax cost of debt, 15% cost of equity, and a 35% tax rate would be: 0.65x (1-35%) x 8% + 0.35 x 15% = 8.63% 2) The firm has 7,500 bonds outstanding with a face value of \$1,000 per bond. TheA bonds carry a 7 percent coupon, pay interest semiannually, and mature in 8 years. The bonds are selling at 98 percent of face value. The company's tax rate is 34 percent. What is the firm's after-tax cost of debt? Settlement date 1/1/00, maturity date 1/1/08, annual coupon rate 7%, bond price( % of par) 98, face value( % of par) 100, coupons per year 2, then excel function yield = 7.33%, then 7.33% X (1- tax rate) 3) What is the cost of preferred stock that sells for \$10 per share and offers a \$1.20 dividend? \$1.20/\$10.00 = 12% 4)What is the WACC for A firm using 55% equity with a required return of 15%, 35% debt with a required Return of 8%, 10% preferred stock with a required return of 10%, and a tax rate Of 35%? WACC = (.35 x (1 - .35).08) + (.1 x .1) + (.55 x .15) = 1.82% + 1.0% + 8.25% = 11.07% makre sure( debtis first .35 the 1-.35 is tax rate 5)According to CAPM Estimates, what is the cost of equity for a firm with beta of 1.5 when the Risk-free interest rate is 6% and the expected return on the market portfolio Is 15%? Expected return on stock = 6% + 1.5(15% - 6%) = 6 + 13.5 = 19.5% 6. What return on Equity do investors seem to expect for a firm with a \$55 share price, an Expected dividend of \$5.50, a beta of .9 and a constant growth rate of 5.5%? = formula DIV/Po + G= 5.50/55.0+5.5% = 10%+ 5.5%= 15.5% 7) Company X has 2 Million shares of common stock outstanding at a book value of \$2 per share. The Stock trades for \$3.00 per share. It also has \$2 million in face value of debt That trades at 90% of par. What is its ratio of debt to value for WACC Purposes?2 Million shares x \$3.00 = \$6,000,000 \$2 million debt x 90% = \$1,800,000 Total value = \$7,800,000 \$1.8 million/\$7.8 million = 23% 8) Peter's Audio Shop Has a before-tax cost of debt of 7%, a cost of equity of 11%, and a cost of Preferred stock of 8%. The firm has 104,000 shares of common stock outstanding At a market price of \$20 a share. There are 40,000 shares of preferred stock Outstanding at a market price of \$34 a share. The bond issue has a total face Value of \$500,000 and sells at 102% of face value. The tax rate is 34%. What is The weighted average cost of capital for Peter's Audio Shop?

Debt: \$500,000 ´ 1.02 = \$.51m

Preferred: 40,000 ´ \$34 = \$1.36m
Common: 104,000 ´ \$20 = \$2.08m

Total = \$.51m + \$1.36m + \$2.08m = \$3.95m