common shares.

1). Whitewall Tire Co. just paid a $1.60 dividend on its common shares. If Whitewall is expected to increase its annual dividend by 2 percent 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?

2). WACC for a firm: Capital Co. has a capital structure, based on current market values, that consists of 50 percent debt, 10 percent preferred shares, and 40 percent common shares. If the returns required by investors are 8 percent, 10 percent, and 15 percent for debt, preferred equity, and common stock, respectively, what is Capital’s after-tax WACC? Assume that the firm’s marginal tax rate is 40 percent.

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3)Morgan Insurance Ltd. issued a fixed-rate perpetual preferred stock three years ago and placed it privately with institutional investors. The stock was issued at $25 per share with a $1.75 dividend. If the company were to issue preferred stock today, the yield would be 6.5 percent. The stock’s current value is

a. $25.00

b. $26.92

c. $37.31

d. $40.18

4) What does the WACC for a firm tell us?

5) Your boss just completed computing your firm’s weighted average cost of capital. He is relieved because he says that he can now use that cost of capital to evaluate all projects that the firm is considering for the next four years. Evaluate that statement.

6). Maltese Falcone, Inc., has not checked its weighted average cost of capital for four years. Firm management claims that since Maltese has not had to raise capital for new projects since that time, they should not have to worry about their current weighted average cost of capital since they have essentially locked in their cost of capital. Critique that statement.

7). Mike’s T-Shirts, Inc., has debt claims of $400 (market value) and equity claims of $600 (market value). If the after-tax cost of debt financing is 11 percent and the cost of equity is 17 percent, what is Mike’s weighted average cost of capital?

8). The market value of a firm’s assets is $3 billion. If the market value of the firm’s liabilities is $2 billion, what is the market value of the stockholders’ investment and why?

9). Below is a partial aging of accounts receivable for Bitar Roofing Services. Fill in the rest of the information and determine Bitar’s days’ sales outstanding. How does it compare to the industry average of 40 days?
Age of Account (days) Value of Account % of Total Value
0–10 $211,000
11–30  120,360
31–45  103,220
46–60   72,800


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