Problem 18-4 WACC
If Wild Widgets, Inc., were an all-equity company, it would have a beta of .85. The company has a target debtequity ratio of .40. The expected return on the market portfolio is 11 percent, and Treasury bills currently yield 4 percent. The company has one bond issue outstanding that matures in 20 years and has a coupon rate of 7 percent. The bond currently sells for $1,080. The corporate tax rate is 34 percent.
a.
What is the companys cost of debt? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
Cost of Debt = _______________%
b.
What is the companys cost of equity? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
Cost of equity = ______________%
c.
What is the companys weighted average cost of capital? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
WACC = ______________%
Problem 20-4 IPO Underpricing
The Woods Co. and the Garcia Co. have both announced IPOs at $40 per share. One of these is undervalued by $9, and the other is overvalued by $4, but you have no way of knowing which is which. You plan on buying 1,000 shares of each issue. If an issue is underpriced, it will be rationed, and only half your order will be filled.
If you could get 1,000 shares in Woods and 1,000 shares in Garcia, what would your profit be? (Do not round intermediate calculations.)
Profit = $_______________
What profit do you actually expect? (Do not round intermediate calculations.)
Expected profit $_______________
Problem 21-14 Lease or Buy
Wolfson Corporation has decided to purchase a new machine that costs $3.2 million. The machine will be depreciated on a straight-line basis and will be worthless after four years. The corporate tax rate is 35 percent. The Sur Bank has offered Wolfson a four-year loan for $3.2 million. The repayment schedule is four yearly principal repayments of $800,000 and an interest charge of 9 percent on the outstanding balance of the loan at the beginning of each year. Both principal repayments and interest are due at the end of each year. Cal Leasing Corporation offers to lease the same machine to Wolfson. Lease payments of $950,000 per year are due at the beginning of each of the four years of the lease.
a.
What is the NAL of leasing for Wolfson? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
NAL = $______________________
b.
What is the maximum annual lease Wolfson would be willing to pay? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567. Do not round intermediate calculations and round your answer to the nearest whole dollar amount. (e.g., 32))
Annual lease payment $________________