Management - KneeMan Markup Company - WACC - Management Assessment Answer

Management Assessment Answer

Assignment Task: Chapter 13 HW Questions Note: For each non-excel question, you must provide your source in the proper APA format. Reminder: If you DO NOT have a formula within your answer cell, it will not be marked correct! You must show your work within the excel formula!

1.  Finance balance sheet: KneeMan Markup Company has total debt obligations with book and market values equal to $30 million and $28 million, respectively. It also has total equity with book and market values equal to $20 million and $70 million, respectively. If you were going to buy all of the assets of KneeMan Markup today, how much should you be willing to pay?
2.  WACC: What is the weighted average cost of capital for a firm?
3.  Taxes and the cost of debt: How are taxes accounted for when we calculate the cost of debt?
4.  Cost of common stock: List and describe each of the three methods used to calculate the cost of common stock.
5.  Cost of common stock: Whitewall Tire Co. just paid an annual dividend of $1.60 on its common shares. If Whitewall is expected to increase its annual dividend by 2 per cent per year into the foreseeable future and the current price of Whitewall's common shares is $11.66, what is the cost of common stock for Whitewall?
6.  Cost of common stock: Seerex Wok Co. is expected to pay a dividend of $1.10 one year from today on its common shares. That dividend is expected to increase by 5 per cent every year thereafter. If the price of Seerex common stock is $13.75, what is the cost of its common equity capital?
7.  Cost of common stock: Two-Stage Rocket paid an annual dividend of $1.25 yesterday, and it is commonly known that the firm's management expects to increase its dividend by 8 per cent for the next two years and by 2 per cent thereafter. If the current price of two-stages common stock is $17.80, what is the cost of common equity capital for the firm?
8. Cost of preferred stock: Fjord Luxury Liners has preferred shares outstanding that pay an annual dividend equal to $15 per year. If the current price of Fjord preferred shares is $107.14, what is the after-tax cost of preferred stock for Fjord?
9. Cost of preferred stock: Kreisler Autos has preferred shares outstanding that pay annual dividends of $12, and the current price of the shares is $80. What is the after-tax cost of new preferred shares for Kreisler if the flotation (issuance) costs for preferred shares are 5 per cent?
10.  WACC: Describe the alternatives to using a firm's WACC as a discount rate when evaluating a project.
11. WACC: Capital Co. has a capital structure, based on current market values, that consists of 50 per cent debt, 10 per cent preferred stock, and 40 per cent common stock. If the returns required by investors are 8 per cent, 10 per cent, and 15 per cent for the debt, preferred stock, and common stock, respectively, what is Capital's after-tax WACC? Assume that the firm's marginal tax rate is 40 per cent.
12.  WACC: What are the direct out-of-pocket costs?

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