81.A Convertible Bond Has a Face Value of $1,000 and a Conversion Price of $22.50. The
81.A convertible bond has a face value of $1,000 and a conversion price of $22.50. The
bond has a 6 percent coupon and pays interest semi-annually. The bond matures in six years. Similar bonds are yielding 7 percent. The current price of the stock is $21.24. What is the conversion value of this bond?
$944.00
Conversion value = $1,000 $22.50 $21.24 = $944.00
82.The weighted average of the firm’s costs of equity, preferred stock, and aftertax debt is
the:
weighted average cost of capital (WACC).
83.The capital structure weights used in computing the weighted average cost of capital
are:
based on the market value of the firm’s debt and equity securities.
84.When a firm has flotation costs equal to 6 percent of the funding need, it should:
increase the initial project cost by dividing that cost by (1 .06).
85.Blackwater Adventures has a bond issue outstanding that matures in sixteen years. The
bonds pay interest semi-annually. Currently, the bonds are quoted at 103 percent of
face value and carry a 9 percent coupon. The firm’s tax rate is 34 percent. What is the firm’s after-tax cost of debt?
5.71 percent
Enter 1622/ 1030 90/2 1000
NI/YPVPMTFV
Solve for 8.65
After-tax Rd = 8.65 percent (1 .34) = 5.71 percent
86.The Abco Co. maintains a debt-equity ratio of .70 and has a tax rate of 39 percent. The firm does not issue preferred stock. The cost of equity is 12 percent and the after-tax cost of debt is 5 percent. What is Abco’s weighted average cost of capital?
9.1 percent
Debt = .7; Equity = 1.0; Total = .7 + 1.0 = 1.7; Debt-equity ratio = .7 1.0 = .7
= 9.1 percent
87.Tony’s Pizza is considering a new project that they consider to be a little riskier than their current operations. Thus, management has decided to add an additional 2 percent to their company’s overall cost of capital when evaluating this project. The project has an initial cash outlay of $42,000 and projected cash inflows of $15,000 in year one, $25,000 in year two, and $12,000 in year three. The firm uses 35 percent debt and 65 percent common stock as their capital structure. The company’s cost of equity is 13 percent while the after-tax cost of debt for the firm is 6 percent. What is the projected net present value of the new project?
-$520.29
WACCFirm = (.65 .13) + (.35 .06) = .0845+.021= .1055
WACCProject =.1055 +.02 = .1255
The following balance sheet and income statement should be used for questions #88 through #100:
J, Inc.
2005 Income Statement
($ in millions)
Net sales $9,790
Less: Cost of goods sold 6,870
Less: Depreciation 520
Earnings before interest and taxes 2,400
Less: Interest paid 140
Taxable Income $ 2,260
Less: Taxes 791
Net income $ 1,469
J, Inc.
2004 and 2005 Balance Sheets
($ in millions)
2004 2005 2004 2005
Cash $130 $150 Accounts payable $1,320 $1,450
Accounts rec. 1,070 1,250 Long-term debt 760 1,170
Inventory 1,520 1,080 Common stock 4,200 3,700
Total $2,720 $2,480 Retained earnings 570 860
Net fixed assets 4,130 4,700
Total assets $6,850 $7,180 Total liabilities & equity$6,850 $7,180
88.What is the current ratio for 2005?
1.71
2480/1450=1.71
89.What is the quick ratio for 2005?
.0.97
(150+1250)/1450=0.97
90.What is the debt-equity ratio for 2005?
0.57
(1450+1170)/(3700+860)=0.57