Reference no: EM132994027

Questions -

Q1-Case - Cost of Equity (using DGM and SML)What is Thajba cost of equity? Compute using both SML and DGM Thajba & Friends Co. has a beta of 1.5. The market risk premium is expected to be 8%, and the 3 months T-Bills is 6%. The analyst has estimated that dividends will grow at 6% per year. Last year dividend was $2. Thajba's stock is currently selling for $15.65.

Q2-Case - Find Cost of Debt - Ali Reza Co. has a bond issue currently outstanding that has 25 years left to maturity. The coupon rate is 9%, and coupons are paid semiannually. The bond is currently selling for $908.72 per $1,000 bond. What is the Ali Reza's cost of debt?

Q3-Case - Cost of Preferred Stock - Karim Co. has preferred stock that has an annual dividend of $3. The preferred stock was originally issued by the company at a price of $27. If the current price is $25, what is Karim's cost of preferred stock?

Q4-Case - Capital Structure Weights - Hasan Co. has a market value of equity equal to $500 million and a market value of debt equal to $475 million. What are the capital structure weights of Hasan Co.?

Q5-Comprehensive Case- WACC - Equity Information -

50 million shares

$80 per share

Beta = 1.15

Market risk premium = 9%

Risk-free rate = 5%

Debt Information

1 billion in outstanding debt (face value)

Current quote = 110

Coupon rate = 9%, semiannual coupons

15 years to maturity

Tax rate = 40%

Calculate:

a. Cost of Equity

b. Cost of Debt

c. After tax cost of debt

 

d. Cost of capital

e. The proportion of debt and equity

Q6- What would happen if we use the WACC for all projects regardless of risk?

Assume the WACC = 15%

Project Required Return IRR

A 20% 17%

B 15% 18%

C 10% 12%

WACC

Q7- NPV and Flotation Costs

Khalid Co. is considering a project that will cost $1 million. The project will generate after-tax cash flows of $250,000 per year for 7 years. The WACC is 15%, and the firm's target D/E ratio is 0.6 The flotation cost for equity is 5%, and the flotation cost for debt is 3%. What is the NPV for the project after adjusting for flotation costs?

Q8- Comprehensive Problem

A corporation has 10,000 bonds outstanding with a 6% annual coupon rate, 8 years to maturity, a $1,000 face value, and a $1,100 market price.

The company's 100,000 shares of preferred stock pay a $3 annual dividend, and sell for $30 per share.

The company's 500,000 shares of common stock sell for $25 per share and have a beta of 1.5. The risk free rate is 4%, and the market return is 12%.

Assuming a 40% tax rate, what is the company's WACC?