What is the maximum initial cost the company would be

Question

Question 1

Mudvayne, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 14 years to maturity that is quoted at 106 percent of face value. The issue makes semiannual payments and has an embedded cost of 8 percent annually.

 

What is the company's pretax cost of debt? (Do not round intermediate calculation and round your answer to 2 decimal places. (e.g., 32.16))

 

Cost of debt

%

 

If the tax rate is 35 percent, what is the aftertax cost of debt? (Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16))

 

Cost of debt	%

 

Question 2

Erna Corp. has 4 million shares of common stock outstanding. The current share price is $83, and the book value per share is $8. Erna Corp. also has two bond issues outstanding. The first bond issue has a face value of $90 million, has a coupon of 6 percent, and sells for 98 percent of par. The second issue has a face value of $60 million, has a coupon of 7 percent, and sells for 106 percent of par. The first issue matures in 21 years, the second in 3 years.

 

a.	What are Erna's capital structure weights on a book value basis? (Round your answer to 4 decimal places. (e.g., 32.1616))

 

Equity/Value
Debt/Value

 

b.	What are Erna's capital structure weights on a market value basis? (Round your answer to 4 decimal places. (e.g., 32.1616))

 

Equity/Value
Debt/Value

Question 3

You are given the following information for Lightning Power Co. Assume the company's tax rate is 40 percent.

 

Debt:	8,000 6.9 percent coupon bonds outstanding, $1,000 par value, 20 years to maturity, selling for 105 percent of par; the bonds make semiannual payments.
Common stock:	410,000 shares outstanding, selling for $59 per share; the beta is 1.15.
Preferred stock:	19,000 shares of 3 percent preferred stock outstanding, currently selling for $79 per share.
Market:	9 percent market risk premium and 4.90 percent risk-free rate.

 

What is the company's WACC? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

 

WACC	%

 

Question 4

Scanlin, Inc., is considering a project that will result in initial aftertax cash savings of $1.89 million at the end of the first year, and these savings will grow at a rate of 2 percent per year indefinitely. The firm has a target debt-equity ratio of 0.80, a cost of equity of 12.9 percent, and an aftertax cost of debt of 5.7 percent. The cost-saving proposal is somewhat riskier than the usual project the firm undertakes; management uses the subjective approach and applies an adjustment factor of 1 percent to the cost of capital for such risky projects.

 

What is the maximum initial cost the company would be willing to pay for the project? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567. Do not round intermediate calculations and round your final answer to the nearest whole dollar amount.)

 

Maximum cost

$