Easy Problem Chapter 11

Untuk memenuhi tugas individu mata kuliah Accounting and Finance

Dosen

Sri Handaru Yuliati, Dra., M.B.A

Disusun oleh

Aliza Safira Salsabilla Purwanto

21/476049/NEK/25481

MAGISTER MANAJEMEN

FAKULTAS EKONOMIKA DAN BISNIS

UNIVERSITAS GADJAH MADA

YOGYAKARTA

2021
4. Javis & Sons’s common stock currently trades at $30.00 a share. It is expected to pay an
annual dividend of $3.00 a share at the end of the year (D 1 = $3.00), and the constant
growth rate is 5% a year.
a) What’s the company’s cost of common equity it all of its equity comes from retained
earnings?
D1
rs = +g
P0
3.00
rs = +5 %
30.00
rs = 15%
b) If the company issued new stock, it would incur a 10% flotation cost. What would be
the cost of equity from new stock?
D1
re = +g
P 0 (1−F)
3.00
re = +5 %
30.00(1−0.1)
re = 16.11%

5. Midwest Water Works estimates that its WACC is 10.5%. The company is considering
the following capital budgeting projects:

Project Size Rate of Return

A $1 million 12.0%
B $2 million 11.5%
C $2 million 11.2%
D $2 million 11.0%
E $1 million 10.7%
F $1 million 10.3%
G $1 million 10.2%
Assume that each of these projects is just as risky as the firm’s existing assets and that the
firm may accept all of the projects or only some of them. Which set of projects should be
accepted? Explains!
 Answer:
If the risk is just as risky as the existing assets, the firm should be accepting project A, B,
C, D, and E. Since the rate of return of those projects are above the estimated WACC.

6. The future earnings, dividends, and common stock price of Carpetto Technologies Inc.
are expected to grow 7% per year. Carpetto’s common stock currently sells for $23.00
per share; its last dividend was $2.00, and it will pay a $2.14 dividend at the end of the
current year.
a) Using the DCF approach, what is the cost of common equity?
D1
rs = +g
P0

2.14
rs = +7 %
23.00
rs = 16.30%
b) If the firm’s beta is 1.6, the risk-free rate is 9%, and the average return on the market
is 13%, what will be the firm’s cost of common equity using the CAPM approach?
rs = rRF + (rM – rRF)b
rs = 9% + (13% - 9%)1.6
rs = 15.4%
c) If the firm’s bonds earn a return of 12%, based on the bond-yield-plus-risk-premium
approach, what will be the rs?
rs = bond yield + risk premium
rs = 12% +4%
rs = 16%
d) If you have equal confidence in the inputs used for the three approaches, what is your
estimate of Carpetto’s cost of common equity?
Using the midpoint of the ranged Carpetto’s cost of common equity is 15.9%

7. The Evanec Company’s next expected dividend, D 1, is $3.18; its growth rate is 6%; and
its common stock now sells for $36.00. New stock (external equity) can be sold to net
$32.40 per share.
 a) What is Evanec’s cost of retained earnings, rs?

D1
rs = +g
P0

3.18
rs = +6 %
36.00
rs = 14.83%
b) What is Evanec’s percentage floatation cost, F?
P1 = P0 (1-F)
32.40 = 36.00 (1-F)
36.00F = 3.6
F = 10%
c) What is Evanec’s cost of new common stock, rs?
D1
re = +g
P 0 (1−F)
3.18
re = +6 %
3 6.00(1−0.1)
re = 15.8%

8. Patton Paints Corporation has a target capital structure of 40% debt and 60% common
equity, with no preferred stock. Its before-tax cost of debt is 12%, and its marginal tax
rate is 40%. The current stock price is P0 = $22.50. The last dividend was D0 = $2.00, and
it is expected to grow at a 7% constant rate. What is its cost of common equity and its
WACC?
a) Cost of common equity
D1 = D0 (1+g)
D1 = 2.00 (1+0.07)
D1 = $2.14
D1
rs = +g
P0
2.14
rs = +7 %
22.50
 rs = 16.51%
b) WACC = wdrd(1 – T) + wcrs
WACC = 0.4(12%)(1 – 0.4) + 0.6(16.51%)
WACC = 12.79%

9. The Patrick Company’s year-end balance sheet is shown below. Its cost of common
equity is 16%, its before tax cost of debt is 13%, and its marginal tax rate is 40%.
Assume that the firm’s long-term debt sells at par value. The firm’s total debt, which is
the sum of company’s short-term and long-term debt, equals $1,152. The firm has 576
shares of common stock outstanding that sells for $4.00 per share. Calculate Patrick’s
WACC using market value weights.

Assets Liabilities and Equity

Cash $ 130 Accounts payable $ 10
and accruals
Accounts 240 Short-term debt 52
receivable
Inventories 360 Long-term debt 1,100
Plant and 2,160 Common equity 1,728
equipment, net
Total assets $2,890 Total liabilities $2,890
and equity
Answer:
Total capitals: 1,152 + 576(4) = $3,456
1,152
wd = ×100 %
3,456
wd = 33.33%
2,304
wc = × 100 %
3,456
wc = 66.67%
WACC = wdrd(1 – T) + wcrs
WACC = 33.33%(13%)(1 – 0.4) + 66.67%(16%)
WACC = 13.27%