6. Avicorp has a $13.4 million debt issue outstanding, with a 6.2% coupon rate. The debt
has semiannual coupons, the next coupon is due in six months, and the debt matures
in five years. It is currently priced at 94% of par value.
a. What is Avicorp’s pretax cost of debt?
b. If Avicorp faces a 40% tax rate, what is its after-tax cost of debt?
7. Laurel, Inc., has debt outstanding with a coupon rate of 6.1% and a yield to maturity
of 7.1%. Its tax rate is 38%. What is Laurel’s effective (after-tax) cost of debt?
11. HighGrowth Company has a stock price of $18. The firm will pay a dividend next year
of $1.12, and its dividend is expected to grow at a rate of 3.6% per year thereafter.
What is your estimate of HighGrowth’s cost of equity capital?
12. Slow ’n Steady, Inc., has a stock price of $34, will pay a dividend next year of $3.25,
and has expected dividend growth of 1.3% per year. What is your estimate of Slow ’n
Steady’s cost of equity capital?
13. Mackenzie Company has a price of $32 and will issue a dividend of $2 next year. It
has a beta of 1.5, the risk-free rate is 5.6%, and it estimates the market risk premium
to be 4.8%.
a. Estimate the equity cost of capital for Mackenzie.
b. Under the CGDM, at what rate do you need to expect Mackenzie’s dividends to
grow to get the same equity cost of capital as in part (a)?
17. Growth Company’s current share price is $20 and it is expected to pay a $1 dividend per
share next year. After that, the firm’s dividends are expected to grow at a rate of 4% per year.
a. What is an estimate of Growth Company’s cost of equity?
b. Growth Company also has preferred stock outstanding that pays a $2 per share
fixed dividend. If this stock is currently priced at $28, what is Growth Company’s
cost of preferred stock?
c. Growth Company has existing debt issued three years ago with a coupon rate
of 6%. The firm just issued new debt at par with a coupon rate of 6.5%. What is
Growth Company’s pretax cost of debt?
d. Growth Company has 5 million common shares outstanding and 1 million pre
Its liabilities have a market value of $20 million. If Growth Company’s common
and preferred shares are priced as in parts (a) and (b), what is the market value of
Growth Company’s assets?
e. Growth Company faces a 25% tax rate. Given the information in parts (a) through
(d), and your answers to those problems, what is Growth Company’s WACC?
18. A retail coffee company is planning to open 110 new coffee outlets that are expected
to generate $15.2 million in free cash flows per year, with a growth rate of 2.9% in
perpetuity. If the coffee company’s WACC is 9.7%, what is the NPV of this expansion?