1. Sustain In. has a target capital structure of 70 percent common stock and 30 percent debt. Its cost of equity is 13 percent, and the cost of debt is 6 percent. The relevant tax rate is 35 percent. What is Sustain Inc’s WACC?
A. 10.39 %
B. 11.90%
C. 11.55%
D. 12.65% E. Impossible to calculate with information given.
2. Cammy, Inc., has debt outstanding with a face value of $6 million. The value of the firm if it were entirely financed by equity would be $17.85 million. The company also has 350,000 shares of stock outstanding that sell at a price of $38 per share. The corporate tax rate is 35 percent. What is the decrease in the value of the company due to expected bankruptcy costs?
A. $650,000
B. $1,000,000
C. $19,300,000 D. 750,000
E. Impossible to calculate with information given.
3. Lola’s Dance Studio currently has debt outstanding with a market value of $100,000 and a cost of 8 percent. The company has EBIT of $8,000 that is expected to continue in perpetuity. Assume there are no taxes.
I. What is the value of the company's equity?
A. $50,000
B. $100,000
C. $1,000,000
D. $0
E. Impossible to calculate with information given.
II. What is the debt-to-value ratio?
A. 1.0
B. 1.9
C. 0.5
D. 1.26
E. Impossible to calculate with information given.
III. What are the equity value and debt-to-value ratio if the company's growth rate is 3 percent?
A. 1.000
B. 0.954
C. 0.641
D. 1.263
E. Impossible to calculate with information given.
IV. What are the equity value and debt-to-value ratio if the company's growth rate is 7 percent?
A. 1.000
B. 0.954
C. 0.641
D. 1.263
E. Impossible to calculate with information given.