60 Review Problems

Chapter 6 Review Problems

1. SodaFizz has debt outstanding that has a market value of $3 million. The company’s stock has a book value of $2 million and a market value of $6 million. What are the weights in SodaFizz’s capital structure?

2. The yield to maturity on SodaFizz’s debt is 7.2%. If the company’s marginal tax rate is 21%, what is SodaFizz’s effective cost of debt?

3. SodaFizz paid a dividend of $2 per share last year; its dividend has been growing at a rate of 2% per year, and that growth rate is expected to continue into the future. The stock of SodaFizz is currently trading at $19.50 per share. According to the constant dividend growth model, what is the cost of equity capital for SodaFizz?

4. SodaFizz has a beta of 1.1. If the risk-free rate is 3% and the market risk premium is 11%, what is the cost of equity capital for SodaFizz according to the capital asset pricing model?

5. Given the answers to Problems 1, 2, and 3, what is SodaFizz’s WACC when the constant dividend growth model is used to calculate its equity cost of capital?

6. Given the answers to Problems 1, 2, and 4, what is SodaFizz’s WACC when the CAPM is used to calculate SodaFizz’s equity cost of capital?

7. Shirley Manufacturing paid $1 million in interest payments last year. The company is in the 21% tax bracket and has $15 million in debt outstanding. How much was the company’s interest tax shield last year?

8. King Medical Supplies has issued preferred stock that pays a yearly dividend of $4 per share. This preferred stock is trading at a price of $47 per share. What is King’s cost of preferred stock capital?

9. McPherson Pharmaceutical has common stock that is trading for $75 per share. The company paid a dividend of $5.25 last year. This dividend is expected to increase at a rate of 3% per year. What is the cost of equity capital for McPherson? If McPherson issues new shares with a flotation cost of $2 per share, what is the company’s cost of new equity?