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%