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# Finance questions

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10-1 AFTER-TAX COST OF DEBT The Heuser Company's currently outstanding bonds have a 10% coupon and a 12% yield to maturity. Heuser believes it could issue new bonds at par that would provide a similar yield to maturity. If its marginal tax rate is 35%, what is Heuser's after-tax cost of debt?

10-3 COST OF COMMON EQUITY Percy Motors has a target capital structure of 40% debt and 60% common equity, with no preferred stock. The yield to maturity on the company's outstanding bonds is 9%, and its tax rate is 40%. Percy's CFO estimates that the company's WACC is 9.96%. What is Percy's cost of common equity?

10-5 PROJECT SELECTION Midwest Water Works estimates that its WACC is 10.5%. The company is considering the following capital budgeting projects:
Assume that each of these projects is just as risky as the firm's existing assets and that the firm may accept all the projects or only some of them. Which set of projects should be accepted? Explain.

10-9 WACC The Patrick Company's cost of common equity is 16%, its before-tax cost of debt is 13%, and its marginal tax rate is 40%. The stock sells at book value. Using the following balance sheet, calculate Patrick's WACC.

10-11 WACC AND PERCENTAGE OF DEBT FINANCING Hook Industries' capital structure consists solely of debt and common equity. It can issue debt at rd = 11%, and its common stock currently pays a \$2.00 dividend per share (D0 = \$2.00). The stock's price is currently \$24.75, its dividend is expected to grow at a constant rate of 7% per year, its tax rate is 35%, and its WACC is 13.95%. What percentage of the company's capital structure consists of debt?

https://brainmass.com/economics/bonds/finance-questions-324126

#### Solution Summary

The solution explains some finance questions relating to cost of debt, cost of equity, project selection and WACC

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## Answers to Various Financial Questions

Jenny just married Tim. Jenny remains to work as a cashier for a restaurant, and her monthly income has averaged \$2,840 a month over the past year. Tim is working as a computer programmer and earns \$3,000 a month. Their shared monthly income let them to live comfortably. Yet they have been unable to save any money for urgent situation.
According to Tim, "It's hard to believe, but we don't even have a savings account because we spend almost everything we make." Every month, they deposit each of their paychecks in separate checking accounts. Tim pays the rent and makes the car payment. Pam buys the groceries and pays the utilities. They use the money left over to purchase new clothes and the other "necessities" for enjoying life.
In an effort to make wise use of credit, the Turner have examined various sources that could serve their current and future financial needs. In the assessment process, they compared the APR along with various fees and potential charges.
Tim and Jenny are also learning about various actions that might be useful if they encounter credit troubles. Their discussions with friends and money management advisers provided expanded knowledge of credit counseling and bankruptcy alternatives.
Life Situation Financial Data
Recently Married
Pam, 26
Josh, 28
Renting an Apartment Monthly income \$5,840
Living expenses \$3,900
Assets \$13,500
Liabilities \$4,800
Emergency fund \$1,000

Q1. What is the minimum amount that the Turner should have in an emergency fund? What actions might be taken to increase the amount in this fund?

1. Lucy lacks cash to pay for a \$720 dishwasher. She could buy it from the store on credit by making 12 monthly payments of \$65. The total cost would then be \$780. Instead, Lucy decides to deposit \$60 a month in the bank until she has saved enough money to pay cash for the dishwasher. One year later, she has saved \$770.40—\$720 in deposits plus interest. When she goes back to the store, she finds the dishwasher now costs \$849.60. Its price has gone up 18 percent, the current rate of inflation.
From the financial standpoint, was postponing her purchase a good trade-off for Lucy?

Yes ___
No ___

2. Malou is trying to decide whether she can afford a loan she needs in order to go to chiropractic school. Right now Malou is living at home and works in a shoe store, earning a gross income of \$3250 per month. Her employer deducts a total of \$150 for taxes from her monthly pay. Malou also pays \$100 on credit card debt each month. The loan she needs for chiropractic school will cost an additional \$140 per month.
Calculate her debt payments-to-income ratio without college loan. Remember to convert your answer to a percentage!

3. Sally is trying to decide whether she can afford a loan she needs in order to go to chiropractic school. Right now Sally is living at home and works in a shoe store, earning a gross income of \$2990 per month. Her employer deducts a total of \$200 for taxes from her monthly pay. Sally also pays \$100 on credit card debt each month. The loan she needs for chiropractic school will cost an additional \$100 per month.
Calculate her debt payments-to-income ratio with college loan. Don't forget to convert your answer to a percentage.