43.Peter’s Audio Shop has a cost of debt of 7 percent, a cost of equity of 11 percent, and a cost of preferred stock of 8percent. The firm has 104,000 shares of common stock outstanding at a market price of $20 a share. There are 40,000 shares of preferred stock outstanding at a market price of $34 a share. The bond issue has a total face valueof $500,000 and sells at 102 percent of face value. The company’s tax rate is 34 percent(debt). What is the weighted average cost of capital for Peter’s Audio Shop? a.6.14 percentDollar amountb.6.54 percentcost of equity: 11%=common stock:104,000*20 =2.08milc.8.60 percentcost of preferred stock: 8% =preferred stock: 40,000*34 =1.36mild.9.14 percentcost of debt:7% = bonds(debt): 500,000*1.02 =.51mile.9.45 percentweight=C+P+DTotal3.95milOn for debt = must apply tax rate Wacc= (2.08/3.95)(.11)+(1.36/3.95)(.08)+(.51/3.95)(.07)(1-.34)=9.14%
9. The market rate of return is 11 percent (rm)and the risk free rate (treasury bill) of return is 3 percent (er). Lexant stock has 3 percent less systematic risk (measured by beta) than the market and has an actual return of 12 percent. This stock: Market has a beta of 1 > 1-.03=.97CAPM: Er= Rf+B(Rm-Rf).03+.97(.11-.03) = .1076Er<Ar = underpriced - plots above the Security Market Line Er>Ar = overpriced – plots below the SMLExpected return / actual return
Problem 8 after tax lossEdward's Manufactured Homes purchased some machinery 2 years ago for $319,000. These assets are classifiedas 5-year property for MACRS. The company is replacing this machinery today with newer machines that utilize the latest in technology. The old machines are being sold for $140,000 to a foreign firm for use in its production facility in South America. What is the after-tax salvage value from this sale if the tax rate is 35 percent?Sold for $140,000 book value year 2 = $153,120 = loss (sold 140,000, worth 153,120) = tax savings $153,120-$140,000=$13,120 $13,120(.35) = $4,592 (tax savings) $140,000+$4,592= $144,592Deprecated for 2 years Year ratedepreciation book value120%319,000*.20=63,800319,000-63800=255,200232%319,000*.32=102,080255,200-10,080=153,120255,200-102,080=153,120 Book value2= $319,000 (1 - 0.20 - 0.32) = $153,120Tax on sale = ($140,000 - $153,120) 0.35 = -$4,592 (tax savings)After-tax cash flow = $140,000 + $4,592 = $144,592EXTRA Surfer Dude scored 14 out of 29 on his first test. On his second test he received 23 out of 32 points available. On his final exam, he calculated his score as 84%. Assuming the weights of the tests are 30% and 40%, what is Ralph’s final (numeric) grade for this course?1.30% 14/29= .483 >.30*.483=0.14492.30% 23/32=.7187> .30*.7187=.2156
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