1. Granite Works maintains a debt-equity ratio of .65 and has a tax rate of 21 percent. The pretax cost of debt is 9.8 percent. There are 25,000 shares of stock outstanding with a beta of 1.2 and a market price of $25 a share. The current market risk premium is 8.5 percent and the current risk-free rate is 3.6 percent. This year, the firm paid an annual dividend of $1.90 a share and expects to increase that amount by 3 percent each year. Using an average expected cost of equity, what is the weighted average cost of capital?
A. 15.5 percent
B. 10.5 percent
C. 12.3 percent
D. 11.4 percent
2. Hydro Systems has 15-year bonds outstanding with a coupon rate of 6 percent. Interest is paid semiannually. The face amount of each bond is $1,000. What is the company's pretax cost of debt if the bonds currently sell for $880?
A. 9.96 percent
B. 8.15 percent
C. 7.33 percent
D. 9.07 percent
3. Atlas Corp. wants to raise $4 million via a rights offering. The company currently has 480,000 shares of common stock outstanding that sell for $40 per share. Its underwriter has set a subscription price of $25 per share. Assume that you currently own 7,200 shares of stock in the company and decide not to participate in the rights offering. How much money can you get for selling all of your rights? Ignore underwriting fees.
A. $21,000
B. $27,000
C. $25,000
D. $23,000
4. ABC and XYZ are identical firms in all respects except for their capital structure. ABC is all-equity financed with $600,000 in stock. XYZ uses both stock and perpetual debt; its stock is worth $240,000 and the interest rate on its debt is 9 percent. Both firms expect EBIT to be $78,400. Ignore taxes. The cost of equity for ABC is _____ percent, and for XYZ it is ______ percent.
A. 12.35 percent; 21.37 percent
B. 13.07 percent; 19.17 percent
C. 12.35 percent; 19.07 percent
D. 13.07 percent; 21.37 percent