{"id":416,"date":"2023-03-28T15:35:36","date_gmt":"2023-03-28T15:35:36","guid":{"rendered":"https:\/\/pressbooks.ccconline.org\/ppscacc2010principlesoffinance\/?post_type=chapter&p=416"},"modified":"2023-04-03T00:14:06","modified_gmt":"2023-04-03T00:14:06","slug":"review-problems-2","status":"publish","type":"chapter","link":"https:\/\/pressbooks.ccconline.org\/ppscacc2010principlesoffinance\/chapter\/review-problems-2\/","title":{"raw":"Review Problems","rendered":"Review Problems"},"content":{"raw":"
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Chapter 6 Review Problems<\/h2>\r\n1<\/span>. <\/span>SodaFizz has debt outstanding that has a market value of $3 million. The company\u2019s stock has a book value of $2 million and a market value of $6 million. What are the weights in SodaFizz\u2019s capital structure?<\/span>\r\n\r\n<\/div>\r\n<\/div>\r\n<\/section>
\r\n
\r\n
\r\n\r\n \r\n\r\n2<\/span>. <\/span>The yield to maturity on SodaFizz\u2019s debt is 7.2%. If the company\u2019s marginal tax rate is 21%, what is SodaFizz\u2019s effective cost of debt?<\/span>\r\n\r\n<\/div>\r\n<\/div>\r\n
\r\n
\r\n\r\n \r\n\r\n3<\/span>. <\/span>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?<\/span>\r\n\r\n<\/div>\r\n<\/div>\r\n
\r\n
\r\n\r\n \r\n\r\n4<\/span>. <\/span>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?<\/span>\r\n\r\n<\/div>\r\n<\/div>\r\n<\/section>
\r\n
\r\n
\r\n\r\n \r\n\r\n5<\/span>. <\/span>Given the answers to Problems 1, 2, and 3, what is SodaFizz\u2019s WACC when the constant dividend growth model is used to calculate its equity cost of capital?<\/span>\r\n\r\n<\/div>\r\n<\/div>\r\n
\r\n
\r\n\r\n \r\n\r\n6<\/span>. <\/span>Given the answers to Problems 1, 2, and 4, what is SodaFizz\u2019s WACC when the CAPM is used to calculate SodaFizz\u2019s equity cost of capital?<\/span>\r\n\r\n<\/div>\r\n<\/div>\r\n<\/section>
\r\n
\r\n
\r\n\r\n \r\n\r\n7<\/span>. <\/span>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\u2019s interest tax shield last year?<\/span>\r\n\r\n<\/div>\r\n<\/div>\r\n<\/section>
\r\n
\r\n
\r\n\r\n \r\n\r\n8<\/span>. <\/span>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\u2019s cost of preferred stock capital?<\/span>\r\n\r\n<\/div>\r\n<\/div>\r\n
\r\n
\r\n\r\n \r\n\r\n9<\/span>. <\/span>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\u2019s cost of new equity?<\/span>\r\n\r\n<\/div>\r\n<\/div>\r\n<\/section> \r\n\r\nAttribution:<\/strong>\r\n\r\nThis chapter is from \u201cPrinciples of Finance\u201d \u00a0https:\/\/openstax.org\/books\/principles-finance\/pages\/1-why-it-matters<\/a> by Dahlquist and Knight. This book is licensed under the CC-BY<\/a> 4.0 license. 2022 OpenStax.","rendered":"
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Chapter 6 Review Problems<\/h2>\n

1<\/span>. <\/span>SodaFizz has debt outstanding that has a market value of $3 million. The company\u2019s stock has a book value of $2 million and a market value of $6 million. What are the weights in SodaFizz\u2019s capital structure?<\/span><\/p>\n<\/div>\n<\/div>\n<\/section>\n

\n
\n
\n

 <\/p>\n

2<\/span>. <\/span>The yield to maturity on SodaFizz\u2019s debt is 7.2%. If the company\u2019s marginal tax rate is 21%, what is SodaFizz\u2019s effective cost of debt?<\/span><\/p>\n<\/div>\n<\/div>\n

\n
\n

 <\/p>\n

3<\/span>. <\/span>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?<\/span><\/p>\n<\/div>\n<\/div>\n

\n
\n

 <\/p>\n

4<\/span>. <\/span>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?<\/span><\/p>\n<\/div>\n<\/div>\n<\/section>\n

\n
\n
\n

 <\/p>\n

5<\/span>. <\/span>Given the answers to Problems 1, 2, and 3, what is SodaFizz\u2019s WACC when the constant dividend growth model is used to calculate its equity cost of capital?<\/span><\/p>\n<\/div>\n<\/div>\n

\n
\n

 <\/p>\n

6<\/span>. <\/span>Given the answers to Problems 1, 2, and 4, what is SodaFizz\u2019s WACC when the CAPM is used to calculate SodaFizz\u2019s equity cost of capital?<\/span><\/p>\n<\/div>\n<\/div>\n<\/section>\n

\n
\n
\n

 <\/p>\n

7<\/span>. <\/span>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\u2019s interest tax shield last year?<\/span><\/p>\n<\/div>\n<\/div>\n<\/section>\n

\n
\n
\n

 <\/p>\n

8<\/span>. <\/span>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\u2019s cost of preferred stock capital?<\/span><\/p>\n<\/div>\n<\/div>\n

\n
\n

 <\/p>\n

9<\/span>. <\/span>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\u2019s cost of new equity?<\/span><\/p>\n<\/div>\n<\/div>\n<\/section>\n

 <\/p>\n

Attribution:<\/strong><\/p>\n

This chapter is from \u201cPrinciples of Finance\u201d \u00a0https:\/\/openstax.org\/books\/principles-finance\/pages\/1-why-it-matters<\/a> by Dahlquist and Knight. This book is licensed under the CC-BY<\/a> 4.0 license. 2022 OpenStax.<\/p>\n","protected":false},"author":101,"menu_order":17,"template":"","meta":{"pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"class_list":["post-416","chapter","type-chapter","status-publish","hentry"],"part":30,"_links":{"self":[{"href":"https:\/\/pressbooks.ccconline.org\/ppscacc2010principlesoffinance\/wp-json\/pressbooks\/v2\/chapters\/416","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/pressbooks.ccconline.org\/ppscacc2010principlesoffinance\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/pressbooks.ccconline.org\/ppscacc2010principlesoffinance\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/pressbooks.ccconline.org\/ppscacc2010principlesoffinance\/wp-json\/wp\/v2\/users\/101"}],"version-history":[{"count":5,"href":"https:\/\/pressbooks.ccconline.org\/ppscacc2010principlesoffinance\/wp-json\/pressbooks\/v2\/chapters\/416\/revisions"}],"predecessor-version":[{"id":1303,"href":"https:\/\/pressbooks.ccconline.org\/ppscacc2010principlesoffinance\/wp-json\/pressbooks\/v2\/chapters\/416\/revisions\/1303"}],"part":[{"href":"https:\/\/pressbooks.ccconline.org\/ppscacc2010principlesoffinance\/wp-json\/pressbooks\/v2\/parts\/30"}],"metadata":[{"href":"https:\/\/pressbooks.ccconline.org\/ppscacc2010principlesoffinance\/wp-json\/pressbooks\/v2\/chapters\/416\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/pressbooks.ccconline.org\/ppscacc2010principlesoffinance\/wp-json\/wp\/v2\/media?parent=416"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/pressbooks.ccconline.org\/ppscacc2010principlesoffinance\/wp-json\/pressbooks\/v2\/chapter-type?post=416"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/pressbooks.ccconline.org\/ppscacc2010principlesoffinance\/wp-json\/wp\/v2\/contributor?post=416"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/pressbooks.ccconline.org\/ppscacc2010principlesoffinance\/wp-json\/wp\/v2\/license?post=416"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}