Module Written Assignment - Problems

Problem 1

The Marks Corporation has bonds in the market with the below characteristics. If the company has a marginal tax rate of 35% what is its cost of debt?

Bond Characteristics:
Face Value: $1,000
Coupon Rate: 8%
Frequency of payments: Semi-annual
Years to maturity: 12
Current price of bonds: $925

Problem 2

The Bella Corporation has a beta of 1.4, the market risk premium is 8.2% and the risk-free rate is 2.5%. What is Bella Corporation's cost of equity?

Problem 3

The common stock of the Sleepy Time Company is currently selling for $42 per share. The company expects to pay dividends of $2.00 per share in one year and projects a constant growth rate of 4%. What is the cost of equity for the Sleepy Time Company?

Problem 4

The Up-and-Down company has a cost of equity of 12.2%, a cost of debt of 8.6%, and a marginal tax rate of 40%. The current market value of its debt is $10 million and the current market value of its equity is $25 million.

a) What is Up-and-Down's weighted average cost of capital?

b) What would be the company's WACC if the amount of debt used was $20 million and equity was $15 million?

Problem 5

The Clean-You-Out Car Wash Company company has projected next year's activity as indicated below. Calculate the company's Operating Cash Flow. (The company's marginal tax rate is 35%.)

Next Year's Projection:
Year 1
Sales $2,50,000
Cost of Goods Sold $1,00,000
Administrative Expense $20,000
Depreciation $40,000
Interest Expense $25,000