Question Details

Sapp Trucking- balance sheet shows a total of noncallable 


1.	Which of the following statements is CORRECT?

a.	The WACC as used in capital budgeting is an estimate of a company- before-tax cost of capital.
b.	The percentage flotation cost associated with issuing new common equity is typically smaller than the flotation cost for new debt.
c.	The WACC as used in capital budgeting is an estimate of the cost of all the capital a company has raised to acquire its assets.
d.	There is an “opportunity cost” associated with using retained earnings, hence they are not “free.”
e.	The WACC as used in capital budgeting would be simply the after-tax cost of debt if the firm plans to use only debt to finance its capital budget during the coming year.
	
2.	Rivoli Inc. hired you as a consultant to help estimate its cost of capital.  You have been provided with the following data:  D0 = $0.80; P0 = $22.50; and g = 8.00% (constant).  Based on the DCF approach, what is the cost of equity from retained earnings?

a.	10.69%
b.	11.25%
c.	11.84%
d.	12.43%
e.	13.05%
	
3.	Keys Printing plans to issue a $1,000 par value, 20-year noncallable bond with a 7.00% annual coupon, paid semiannually.  The company's marginal tax rate is 40.00%, but Congress is considering a change in the corporate tax rate to 30.00%.  By how much would the component cost of debt used to calculate the WACC change if the new tax rate was adopted?

a.	0.57%
b.	0.63%
c.	0.70%
d.	0.77%
e.	0.85%
	
4.	S. Bouchard and Company hired you as a consultant to help estimate its cost of capital.  You have obtained the following data:  D0 = $0.85; P0 = $22.00; and g = 6.00% (constant).  The CEO thinks, however, that the stock price is temporarily depressed, and that it will soon rise to $40.00.  Based on the DCF approach, by how much would the cost of equity from retained earnings change if the stock price changes as the CEO expects?

a.	-1.49%
b.	-1.66%
c.	-1.84%
d.	-2.03%
e.	-2.23%
	
5.	Sapp Trucking- balance sheet shows a total of noncallable $45 million long-term debt with a coupon rate of 7.00% and a yield to maturity of 6.00%.  This debt currently has a market value of $50 million.  The balance sheet also shows that the company has 10 million shares of common stock, and the book value of the common equity (common stock plus retained earnings) is $65 million.  The current stock price is $22.50 per share; stockholders' required return, rs, is 14.00%; and the firm's tax rate is 40%.  The CFO thinks the WACC should be based on market value weights, but the president thinks book weights are more appropriate.  What is the difference between these two WACCs?

a.	1.55%
b.	1.72%
c.	1.91%
d.	2.13%
e.	2.36%


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