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24 Feb 2019

Lamey Co. has an unlevered cost of capital of 10.9 percent, a tax rate of 35 percent, and expected earnings before interest and taxes of $21,800. The company has $25,000 in bonds outstanding that sell at par and have a coupon rate of 6 percent. What is the cost of equity?

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Keith Leannon
Keith LeannonLv2
25 Feb 2019

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Forbidden Fruit Extracts expects its earnings before interest and taxes to be $325,000 a year forever. Currently, the firm has no debt. The cost of equity is 16.3 percent and the tax rate is 35 percent. The company is in the process of issuing $2 million of bonds at par that carry a 6.5 percent annual coupon. What is the unlevered value of the firm? $1,296,012 $969,325 $747,485 $431,971 $371,429

Consider GRENLEC Power Co. which has the following information about its capital structures:


 Debt - 4,500 issues 6 percent coupon bonds outstanding, $1,000 par value, 7 years to maturity,
selling for 93 percent of par, the bonds make semiannual payments
 Common Stock - 150,000 shares outstanding, selling for $35 per share; the beta is 1.10
 Preferred Stock - 80,000 shares of 6 percent preferred stock outstanding, currently selling for
$95 per share
 Market Information - 6 percent market risk premium and 4 percent risk-free rate.

Required: Calculate to the following if the company has a tax rate of 36 percent.
i. Total Market Value for the Firm
ii. After-tax cost of Debt
iii. Cost of Equity
iv. Cost of Preferred Stock
v. Weighted Average Cost of Capital

6. Consider GRENLEC Power Co. which has the following information about its capital structures:

 Debt - 4,500 issues 6 percent coupon bonds outstanding, $1,000 par value, 7 years to maturity, selling for 93 percent of par, the bonds make semiannual payments

 Common Stock - 150,000 shares outstanding, selling for $35 per share; the beta is 1.10

 Preferred Stock - 80,000 shares of 6 percent preferred stock outstanding, currently selling for $95 per share

 Market Information - 6 percent market risk premium and 4 percent risk-free rate.

Required: Calculate to the following if the company has a tax rate of 36 percent.

i. Total Market Value for the Firm ( 3 points)

ii. After-tax cost of Debt (3 points)

iii. Cost of Equity (2 points)

iv. Cost of Preferred Stock (2 points)

v. Weighted Average Cost of Capital (3 points)

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