1. The book value of equity of a firm is $82 million and the market value of equity is $96 million. The face value of debt of the firm is $40 million and the market value of debt is $16 million. What is the market value of assets of the firm?
2. The total market value of General Motors (GM) is $10 billion. GM has a market value of $7 billion of equity and a face value of $10 billion of debt. What are the weights in equity and debt that are used for calculating the WACC?
3. The outstanding debt of Home Depot has a yield to maturity of 0.04. The tax rate of Home Depot is 0.14. What is the effective cost of debt of Home Depot?
4. Preferred stock of Ford Motors pays a dividend of $3 each year and trades at a price of $21. What is the cost of preferred stock capital for Ford?
5. IBM expects to pay a dividend of $4 next year and expects these dividends to grow at 7% a year. The price of IBM is $90 per share. Your estimate of the market risk premium is 6%. The risk-free rate of return is 5% and IBM has a beta of 1.2.What is IBM's cost of equity capital using the two methodologies, DGM and CAPM respectively?
6. A firm has a capital structure with $10 in equity and $9 of debt. The cost of equity capital is 0.2 and the pretax cost of debt is 0.07. If the marginal tax rate of the firm is 0.37 compute the weighted average cost of capital of the firm.
7. Which of the following is NOT a step in the WACC valuation method?
a. Discount the incremental free cash flows of the investment using the weighted average cost of capital.
b. Determine the mean weighted average cost of capital for the firm's industry.
c. Compute the weighted average cost of capital.
d. Determine the incremental free cash flows of the investment.
8. Verano Inc. has two business divisions - a software product line and a waste water clean-up product line. The software business has a cost of equity capital of 11% and the waste water clean-up business has a cost of equity capital of 6%. Verano has 50% of its revenue from software and the rest from the waste water business. Verano is considering a purchase of another company in the waste water business using equity financing. What is the appropriate cost of capital to evaluate the business?
9.3%
11%
8.5%
6%
9. Ford Motors expects a new hybrid-engine project to produce incremental cash flows of $74 each year and expects these to grow at a rate of 0.05 each year. The upfront project costs are $559 and Ford's weighted average cost of capital is 0.07. If the issuance costs for external finances are $6, what is the net present value (NPV) of the project?