By NEAS - 11/22/2022 6:58:28 PM
BM Ch9 weighted average cost of capital exhibit practice exam questions
A firm has the following capital structure:
Long-term debt: par value 953,000
Long-term debt: market value 926,414
Coupon rate 7.00%
Yield to maturity 7.29%
Shares of common stock 14,100
Par value per share 65
Market value per share 64
Expected return on common stock of firm 10.10%
Tax rate 30%
Interest on corporate debt is deductible from taxable income.
Question 8.1: market value
What is the firm’s market value?
Answer 8.1: the market value of long-term debt is 926,414, and 14,100 shares of common stock trade at 64 per share, so the firm’s market value is 926,414 + 14,100 × 64 = 1,828,814.
Question 8.2: Debt to value ratio
What is the firm’s debt to value ratio?
Answer 8.2: The firm’s debt to value ratio is 926,414 / 1,828,814 = 50.66%
Question 8.3: Equity to value ratio
What is the firm’s equity to value ratio?
Answer 8.3: The firm’s equity to value ratio is 14,100 × 64 / 1,828,814 = 49.34%
Question 8.4: Cost of debt capital
What is the firm’s cost of debt capital?
Answer 8.4: The firm’s cost of debt capital is the yield to maturity of 7.29%.
Question 8.5: Cost of equity capital
What is the firm’s cost of equity capital?
Answer 8.5: The firm’s cost of equity capital is the expected return on common stock of 10.10%.
Question 8.6: Weighted average cost of capital (WACC)
What is the firm’s after-tax weighted average cost of capital (WACC)?
Answer 8.6: The firm’s after-tax weighted average cost of capital is
50.66% × 7.29% × (1 – 30%) + 49.34% × 10.10% = 7.57%
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