# 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