Cost of Capital Practice Problems 1. A firm has borrowed $400 fo...

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Cost of Capital Practice Problems

1. A firm has borrowed $400 for ten years at a cost of debt of 10%. Repayment terms require the firm to pay interest annually in each of the next ten years starting next year, and then pay the principal amount at the end of the tenth year. The firm’s tax rate is 25%. What is the annual tax break the firm expects to get because of the interest payment? The firm is expected to be very profitable in every future year. State your answer rounded to two decimals (for example, if the answer is 13.4685, enter 13.47).

2. The beta of a stock is 1.2. The risk-free rate is 4% and the market risk premium is 5%. What is the cost of equity? State your answer in percentage terms rounded to two decimals (for example, if the answer is 13.4685%, enter 13.47).

3. The cost of equity is 12%. The cost of debt is 5%. The tax rate is 20%. The target debt ratio is 25%. What is the WACC? State your answer in percentage terms rounded to two decimals (for example, if the answer is 13.4685%, enter 13.47).
Debt ratio = Debt/(Debt + Equity)

4. If a firm’s debt-equity ratio is 25% what is its debt ratio? State your answer in percentage terms rounded to two decimals (for example, if the answer is 13.4685%, enter 13.47).
Debt-equity ratio = Debt/Equity
Debt ratio = Debt/(Debt + Equity)

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1. Interest per year = 400 x 10%
= 40
Annual Tax Break = 40 x 25%
    = 10...

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