1. You are about to start to consider a batch of new capital budgeting projects. Before you begin, you need to estimate your company’s Weighted-Average-Cost-of-Capital (WACC). The firm operates in the 35% marginal tax bracket. There are foursets of liability holders on the balance sheet. Calculate the WACC including all four classes of liabilities.
A. There are 7,630,000 shares of common stock outstanding. These are trading at $43.56 per share. You have decided to use the Gordon Growth Model to estimate the return required by your firm’s shareholders. In the most recent annual report the earnings per share (EPS) were $3.25. You feel that it is reasonable to assume that earnings will grow at about 1.20% into the foreseeable future.
B. There is an issue of 825,000 shares of preferred stock. These securities promise an(perpetual) annual dividend of $7.15. The shares are currently trading for $97.36.
C. There is an issue of 145,000 coupon bonds, which have a face value of $1,000, pay 4.75% (annual) coupons, and mature in 7 years. The securities are currently trading for $930.22.
D. The firm also has 50 short-term commercial paper notes outstanding that have a face value of $1,000,000, and mature in 49 days. These are currently selling for $995,392.37.
2. Contingent credit risk is more serious for futures contracts than forward contracts because the over-the-counter arrangements necessary to replicate the guarantees at a later date.
True
False
3. All off-balance-sheet items will eventually move on to the balance sheet at some point in time.
True
False