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Principles of Finance

Problems

Principles of FinanceProblems
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?
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