Corporate Finance Exam 2 UPDATED
ACTUAL Exam Questions and CORRECT
Answers
10-1: The Heuser Company's currently outstanding bonds have 10% coupon and a 12% YTM.
Heuser believes it could issue new bonds at par that would provide a similar yield to maturity. If
its marginal tax rate is 35%, what is Heuser's after-tax cost of debt? - CORRECT
ANSWER - Rd(1-T) = 0.12 (0.65) = .0780 or 7.8%
10-6b: The future earnings, dividends, and common stock price of Carpetto Technologies Inc. are
expected to grow 7% per year. Carpetto's common stock currently sells for $23 per share; its last
dividend was $2; and it will pay a $2.14 dividend at the end of the current year.
If the firm's beta is 1.6, the risk-free rate is 9% and the average return on the market is 13%, what
will be the firm's cost of common equity using the CAPM approach? - CORRECT
ANSWER - Re = Rrf + (Rm-Rrf)B
= 9% + (13%-9%)1.6
=15.4%
10-9: Cost of common equity is 16%, its before-tax cost of debt is 13%, and its marginal tax rate
is 40%. Assume that the firm's long-term debt sells at par value. The firm's total debt, which is
the sum of the company's short-term debt and long-term debt, equals $1,152. The firm has 576
shares of common stock outstanding that sell for $4.00 per share. Calculate the WACC using
market-value weights?
Assets:
Cash $130
Accounts Receivable $240
Inventories $360
Plant and Equip. $2160
Total assets $2890
, Liabilities&Equity:
Acct payable $10
ST debt $52
LT debt $1,100
Common Equity 1728
Total $2890 - CORRECT ANSWER - BV total debt = ST debt + LT debt = MV
Total debt = $1,152
P0 = $4.00
Shares = 576
T = 40%
WACC = WdRd(1-T) +WeRe
=0.3333(0.13)(0.6) + 0.6667(0.16)
=0.0260 + 0.1067 = 13.27%
Ch.10: J. Peterman Company's raw beta is 2.5 (adjust it). The YTM of their bonds is 9%. The 10-
year T-note is yielding 4%. The firm's tax rate is 21% and the equity risk premium is 5%. Based
on the market value of their securities, the firm currently has 60% of common equity and 40% of
interest-bearing debt and they feel that this is the optimal capital structure. What is the firm's
WACC? - CORRECT ANSWER - Adjusted Beta = .67(2.5) + (.33)(1) = 2.01
rd = 9%
re = 4% + 5(2.01) = 14.05%
WACC = (0.4)[9%(1-.21)] + (0.6)14.05%
=2.844 + 8.43
=11.27%
ACTUAL Exam Questions and CORRECT
Answers
10-1: The Heuser Company's currently outstanding bonds have 10% coupon and a 12% YTM.
Heuser believes it could issue new bonds at par that would provide a similar yield to maturity. If
its marginal tax rate is 35%, what is Heuser's after-tax cost of debt? - CORRECT
ANSWER - Rd(1-T) = 0.12 (0.65) = .0780 or 7.8%
10-6b: The future earnings, dividends, and common stock price of Carpetto Technologies Inc. are
expected to grow 7% per year. Carpetto's common stock currently sells for $23 per share; its last
dividend was $2; and it will pay a $2.14 dividend at the end of the current year.
If the firm's beta is 1.6, the risk-free rate is 9% and the average return on the market is 13%, what
will be the firm's cost of common equity using the CAPM approach? - CORRECT
ANSWER - Re = Rrf + (Rm-Rrf)B
= 9% + (13%-9%)1.6
=15.4%
10-9: Cost of common equity is 16%, its before-tax cost of debt is 13%, and its marginal tax rate
is 40%. Assume that the firm's long-term debt sells at par value. The firm's total debt, which is
the sum of the company's short-term debt and long-term debt, equals $1,152. The firm has 576
shares of common stock outstanding that sell for $4.00 per share. Calculate the WACC using
market-value weights?
Assets:
Cash $130
Accounts Receivable $240
Inventories $360
Plant and Equip. $2160
Total assets $2890
, Liabilities&Equity:
Acct payable $10
ST debt $52
LT debt $1,100
Common Equity 1728
Total $2890 - CORRECT ANSWER - BV total debt = ST debt + LT debt = MV
Total debt = $1,152
P0 = $4.00
Shares = 576
T = 40%
WACC = WdRd(1-T) +WeRe
=0.3333(0.13)(0.6) + 0.6667(0.16)
=0.0260 + 0.1067 = 13.27%
Ch.10: J. Peterman Company's raw beta is 2.5 (adjust it). The YTM of their bonds is 9%. The 10-
year T-note is yielding 4%. The firm's tax rate is 21% and the equity risk premium is 5%. Based
on the market value of their securities, the firm currently has 60% of common equity and 40% of
interest-bearing debt and they feel that this is the optimal capital structure. What is the firm's
WACC? - CORRECT ANSWER - Adjusted Beta = .67(2.5) + (.33)(1) = 2.01
rd = 9%
re = 4% + 5(2.01) = 14.05%
WACC = (0.4)[9%(1-.21)] + (0.6)14.05%
=2.844 + 8.43
=11.27%
