Ch. 11 Practice

Ch. 11 Practice - FIN 3100 Chapter 11 Practice Dr Lucy...

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FIN 3100 Chapter 11 Practice Dr. Lucy Ackert 1. Smith, Inc. is considering a project that will result in a cash inflow at the end of the first year of $1 million (i.e., at time 1). This cash flow will grow at a rate of 4% per year indefinitely. The cost today is $14 million. The target debt-to-equity ratio is .50, the cost of equity is 13%, and the after-tax cost of debt is 8%. a. What is the firm’s weighted average cost of capital? b. Should Smith accept this project? Why or why not? 2. Baker's Footwear has 8,000 shares of common stock outstanding at a price per share of $64 and a rate of return of 15 percent. The firm has 2,000 shares of 6 percent preferred stock outstanding at a price of $54 a share. The preferred stock has a par value of $100. The outstanding debt has a total face value of $100,000 and a market price equal to 102 percent of face value. The yield-to-maturity on the debt is 9.36 percent. a.
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