3.19 Review Questions: Chapter Three
Review Questions: Chapter Three
1. Calculate the Weighted Average Cost of Capital (WACC) for XYZ Company, given the following data for its four capital components.
| Debt | Preferred Stock | Equity
Common + Retained Earnings |
| Debt=$100,000
YTM= 8% Tax Bracket= 35% |
Preferred = $50,000
Dividend= $1.50 P= $25 |
Common Equity = $150,000
Retained Earnings = $75,000 Last Common Dividend- $1.00 Dividend Growh Rate = 2% Flotation Costs = 5% P0= $12 |
2. What would happen if the firm issued more debt? Would its WACC increase or decrease. Assume no change in default rate.
3. If the firm issued $25,000 more in debt at 7%, what would its new WACC be?
4. Why might capital components’ costs change over time? Provide multiple reasons.
5. What numerous accounting manipulations might the firm employ in order to alter its “reported” WACC?
Solution to question #1:
[(0.08) (1 – 0.35) (100) + (1.5/25) (50) + (1.02/12 + 0.02) (75) + {(1.02) / (12) (1 – 0.05) + 0.02} (150)] / 375 = 0.083167
