QUESTION 1
Waller, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 10 years to maturity that is quoted at 93 percent of face value. The issue makes semiannual payments and has an embedded cost of 11 percent annually.
(1) What is the company's pretax cost of debt?
a) 12.72
b) 11.20
c) 11.62
d) 12.84
e) 12.23
(2) If the tax rate is 34 percent, what is the after tax cost of debt?
a) 6.01
b) 7.67
c) 8.40
d) 8.07
e) 8.48
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QUESTION 2
Filer Manufacturing has 5 million shares of common stock outstanding. The current share price is $84, and the book value per share is $7. Filer Manufacturing also has two bond issues outstanding. The first bond issue has a face value of $60 million, has a 7 percent coupon, and sells for 94 percent of par. The second issue has a face value of $35 million, has a 8 percent coupon, and sells for 107 percent of par. The first issue matures in 22 years, the second in 4 years.
The most recent dividend was $5.6 and the dividend growth rate is 8 percent. Assume that the overall cost of debt is the weighted average of that implied by the two outstanding debt issues. Both bonds make semiannual payments. The tax rate is 35 percent.
What is the company's WACC?
a) 13.25%
b) 7.56%
c) 6.01%
d) 13.57%
e) 6.79%
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QUESTION 3
Sixx AM Manufacturing has a target debt-equity ratio of 0.56. Its cost of equity is 17 percent, and its cost of debt is 11 percent. If the tax rate is 34 percent, what is the company's WACC?
a) 10.76%
b) 14.18%
c) 11.55%
d) 12.83%
e) 13.5%