**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**