Reference no: EM132468157

Prompt: After reviewing the data in the table, respond to the problems below. Indicate the answer you believe is correct.

Zonk Corporation Data

Total assets                           $7,460

Interest-bearing debt               $3,652

Average pretax borrowing cost      10.5%

Common equity:

Book value                                $2,950

Market value                            $13,685

Income tax rate                             35%

Market equity beta                        1.13

Problem 1: Assuming that the riskless rate is 2.3% and the market premium is 5.3%, calculate Zonk's cost of equity capital:

A. 10.4%

B. 7.69%

C. 11.89%

D. 8.28%

Problem 2: Determine the weight on debt capital that should be used to calculate Zonk's weighted-average cost of capital:

A. 21.7%

B. 21%

C. 50%

D. 58.2%

Problem 3: Determine the weight on equity capital that should be used to calculate Zonk's weighted-average cost of capital:

A. 79%

B. 78.3%

C. 41.8%

D. 50%

Problem 4: Using the above information, calculate Zonk's weighted-average cost of capital:

A. 11.5%

B. 7.97%

C. 7.48%

D. 10.90%

Problem 5: Assume that Zonk is a potential leveraged buyout candidate. Assume that the buyer intends to put in place a capital structure that has 70 percent debt with a pretax borrowing cost of 14 percent and 30 percent common equity. Compute the revised equity beta for Zonk based on the new capital structure.

A. 4.35

B. 4.34

C. 2.84

D. 3.91

Problem 6: Assume that Zonk is a potential leveraged buyout candidate. Assume that the buyer intends to put in place a capital structure that has 70 percent debt with a pretax borrowing cost of 14 percent and 30 percent common equity. Compute the weighted average cost of capital for Zonk based on the new capital structure.

A. 8.85%

B. 12.56%

C. 13.01%

D. 9.94%