The Holmes Company’s currently outstanding bonds have a 10% yield

QUESTION 1

The Holmes Company’s currently outstanding bonds have a 10% yield to maturity. Holmes believes it could issue new bonds at par that would provide a similar yield to maturity. If its marginal tax rate is 40%, what is Holmes’ after-tax cost of debt?
a.4%
b.5%
c.6%
d.7%
e.8%

QUESTION 2

The Evanec Company’s next expected dividend, D1, 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.
Using the Gordon Model, what is Evanec’s cost of retained earnings, rs?

a.14.44%
b.14.53%
c.14.67%
d.14.78%
e.14.83%

QUESTION 3

What is Evanec’s percentage flotation cost, F?
a.8.00%
b.9.00%
c.10.00%
d.11.00%
e.12.00%

QUESTION 4

Using the Gordon Model, what is Evanec’s cost of new common stock, re?
a.14.91%
b.15.81%
c.16.32%
d.16.24%
e.17.59%

QUESTION 5

You were hired as a consultant to Giambono Company, whose target capital structure is 40% debt, 15% preferred, and 45% common equity. The after-tax cost of debt is 6.00%, the cost of preferred is 7.50%, and the cost of retained earnings is 12.00%. The firm will not be issuing any new stock. What is its WACC?
a.8.93%
b.7.59%
c.6.96%
d.7.68%
e.6.69%

QUESTION 6

The Sarco Company has a target capital structure of 30% debt, 10% preferred stock and 60% common equity from retained earnings. Sarco finished its most recent fiscal with $57 million in retained earnings and would like to raise capital to expand its operations.
Given the information provided above, What is Sarco’s retained earnings breakpoint?
a.$92,000,000
b.$93,000,000
c.$94,000,000
d.$95,000,000
e.$96,000,000

QUESTION 7

Given the information provided above, how much new debt can Sarco raise and still maintain its current capital structure?
a.$28,300,000
b.$28,400,000
c.$28,500,000
d.$28,600,000
e.$28,700,000

QUESTION 8

Given the information provided above, how much new preferred stock can Sarco raise and still maintain its current capital structure?
a.$9,500,000
b.$9,600,000
c.$9,700,000
d.$9,800,000
e.$9,900,000

Here’s the SOLUTION

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