1. Problem 9-02 (After-Tax Cost of Debt)
After-Tax Cost of Debt
LL Incorporated’s currently outstanding 11% coupon bonds have a yield to maturity of 8.5%. LL believes it could issue new bonds at par that would provide a similar yield to maturity. If its marginal tax rate is 25%, what is LL’s after-tax cost of debt? Round your answer to two decimal places.
Answer: %2. Cost of Equity: Dividend Growth
Summerdahl Resort’s common stock is currently trading at $33 a share. The stock is expected to pay a dividend of $2.25 a share at the end of the year (D1 = $2.25), and the dividend is expected to grow at a constant rate of 6% a year. What is the cost of common equity? Round your answer to two decimal places.
Answer: %3. Cost of Equity: CAPM
Booher Book Stores has a beta of 0.8. The yield on a 3-month T-bill is 4% and the yield on a 10-year T-bond is 7%. The market risk premium is 7.5%, and the return on an average stock in the market last year was 15%. What is the estimated cost of common equity using the CAPM? Round your answer to two decimal places.
Answer: %4. WACC
David Ortiz Motors has a target capital structure of 40% debt and 60% equity. The yield to maturity on the company’s outstanding bonds is 11%, and the company’s tax rate is 25%. Ortiz’s CFO has calculated the company’s WACC as 12.9%. What is the company’s cost of equity capital? Round your answer to the nearest whole number.
Answer: %5. NPV
A project has an initial cost of $50,000, expected net cash inflows of $8,000 per year for 11 years, and a cost of capital of 10%. What is the project’s NPV? (Hint: Begin by constructing a time line.) Do not round intermediate calculations. Round your answer to the nearest cent.
Answer: $6. IRR
A project has an initial cost of $55,000, expected net cash inflows of $10,000 per year for 11 years, and a cost of capital of 10%. What is the project’s IRR? Round your answer to two decimal places.
Answer: %
7. MIRR
A project has an initial cost of $45,000, expected net cash inflows of $15,000 per year for 7 years, and a cost of capital of 14%. What is the project’s MIRR? (Hint: Begin by constructing a time line.) Do not round intermediate calculations. Round your answer to two decimal places.
Answer: %
