a. 12.58%b. 18.15%c. 12.18%d. 12.34%e. 11.94%Chapter 9 - Page 20
WACCAnswer: a Diff: M58.A stock analyst has obtained the following information about J-Mart, a large retail chain:•The company has noncallable bonds with 20 years maturity remaining and a maturity value of $1,000. The bonds have a 12 percent annual coupon and currently sell at a price of $1,273.8564.•Over the past four years, the returns on the market and on J-Mart were as follows:YearMarketJ-Mart199912.0%14.5%200017.2 22.22001-3.8 -7.5200220.0 24.0•The current risk-free rate is 6.35 percent, and the expected return on the market is 11.35 percent. The company’s tax rate is 35 percent. The company anticipates that its proposed investment projects will be financed with 70 percent debt and 30 percent equity.What is the company’s estimated weighted average cost of capital (WACC)?a.8.04%b.9.00%c. 10.25%d. 12.33%e. 13.14%WACCAnswer: c Diff: M59.Clark Communications has a capital structure that consists of 70 percent common stock and 30 percent long-term debt. In order to calculate Clark’s weighted average cost of capital (WACC), an analyst has accumulated the following information:•The company currently has 15-year bonds outstanding with annual coupon payments of 8 percent. The bonds have a face value of $1,000 and sell for $1,075.•The risk-free rate is 5 percent.•The market risk premium is 4 percent.•The beta on Clark’s common stock is 1.1.•The company’s retained earnings are sufficient so that they do not have to issue any new common stock to fund capital projects.•The company’s tax rate is 38 percent.Given this information, what is Clark’s WACC?a. 5.93%b. 7.40%c. 7.91%d. 8.07%e. 8.73%Chapter 9 - Page 21
WACCAnswer: d Diff: M60.Reading Foods is interested in calculating its weighted average cost of capital (WACC). The company’s CFO has collected the following information:•The target capital structure consists of 40 percent debt and 60 percent common stock.•The company has 20-year noncallable bonds with a par value of $1,000, a 9 percent annual coupon, and a price of $1,075.•Equity flotation costs are 2 percent.•The company’s common stock has a beta of 0.8.•The risk-free rate is 5 percent.•The market risk premium is 4 percent.•The company’s tax rate is 40 percent.•The company plans to use retained earnings to finance the equity portion of its capital structure, so it does not intend to issue any new common stock.What is the company’s WACC?a. 13.13%b.6.24%c.8.21%d.6.89%e.6.57%WACCAnswer: c Diff: M N61.Financial analysts for Naulls Industries have revealed the following information about the company:•Naulls Industries currently has a capital structure that consists of 75 percent common equity and 25 percent debt.•The risk-free rate, kRF, is 5 percent.•The market risk premium , kM- kRF, is 6 percent.•Naulls’s common stock has a beta of 1.2.