Please answer the questions attached which deal with weighted average cost of capital.
Chapter 13 – Problems
Skyline Insurance Company’s common stock is currently trading for a price of $17 and is expected to pay a dividend of $1 per share next year. There has been a steady growth in dividends of 4.4 percent per year and the market expects this to continue. What is the cost of equity for Skyline Insurance Company?
Answer:
As part of an investment analysis, the Chief Investment Officer of Johnson Insurance Company asks you to determine the cost of equity for Florida Power and Light Company (FPLC). You find that the equity beta for FPLC is 1.07, the expected return on the market is 9 percent, and the risk free rate is 2.5 percent. What is the cost of equity for FLPC?
Answer:
Suede Financial Services Company has a bond issues currently outstanding that has 17 years left until maturity. The bond is currently selling for $1,100, has a coupon rate of 11 percent, and pays coupon payment annually. What is the cost of debt for Suede Financial Services Company? Assume $1,000 face value.
Answer:
Bond Insurance Company’s preferred stock is currently trading for $16 per share and pays an annual dividend of $2 per share. What is the cost of preferred stock for Bond Insurance Company?
Answer:
Jamestown Insurance Services has a target capital structure of 85 percent common stock, 10 percent preferred stock, and 5 percent debt. The cost of equity for Jamestown Insurance Services is 12.5 percent, the cost of preferred stock is 8 percent, the cost of debt is 6 percent, and the relevant tax rate is 30 percent. What is the WACC for Jamestown Insurance Services?
Answer:
Maytown Company has a target capital structure of 60 percent equity and 40 percent debt. Maytown Company currently has 6.5 percent coupon bonds (with annual coupon payments) outstanding with a par value of $1,000 and 20 years left until maturity that are currently selling for $990. In addition, Maytown Company’s equity beta is .9, the risk free rate is 1.5 percent, and the market risk premium is 4 percent. What is the WACC for Maytown Company if the appropriate tax rate is 20 percent?
Answer:
Hawthorn National Bank (HNB) has a target debt to equity ratio of 2.50 and currently does not have any preferred stock outstanding. The cost of debt for GNB is 9 percent and the appropriate tax rate is 35 percent. HNB’s common stock is currently trading for $52 per share and is expected to pay a dividend of $3 next year. In addition, the market expects dividends to grow at a rate of 3 percent indefinitely. What is the WACC for HNB?
Answer:
