1. The Parker Group, a leading producer of custom home electronic accessories, has hired you to estimate the firm's weighted average cost of capital. The balance sheet and some other information are provided below. Assets The stock is currently selling for $15.25 per share, and its noncallable $1,000 par value, 20-year, 7.25% bonds with semiannual payments are selling for $875.00. The beta is 1.25, the yield on a 6-month Treasury bill is 3.50%, and the yield on a 20-year Treasury bond is 5.50%. The required return on the stock market is 11.50%, but the market has had an average annual return of 14.50% during the past 5 years. The firm's tax rate is 40%. What is the best estimate of the after-tax cost of debt?
a) 5.03%
b) 5.14%
c) 5.40%
d) 5.67%
2. If a company's target capital structure is 50% debt and 50% common equity, which would be a correct statement?
a) The cost of reinvested earnings typically exceeds the cost of new common stock.
b) The interest rate used to calculate the WACC is the average after-tax cost of all the company's outstanding debt as shown on its balance sheet.
c) The WACC is calculated on a before-tax basis.
d) The cost of equity is always equal to or greater than the cost of debt.