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Question 6Consider the following balance sheet of a publicly heldcompany:Cash $760,000 Long Term Debt $7,633,500Receivables $1,250,000 Common Stocks $14,176,500Inventories $2,225,000Net Equipment $17,575,000It is estimated that the yield to maturity on bonds are 9%. Thecompany faces a marginal tax rate of 28%. Assume that stock priceof this company rises such that it would sell at 1.35 times itsbook value (amount in the balance sheet) causing its cost of equityto move to 11.5%. What would be the weighted average cost of capital for thisfirm?10.07%9.31%9.91%8.41%Question 7Consider the following balance sheet of a publicly heldcompany:Cash $760,000 Long Term Debt $7,633,500Receivables $1,250,000 Common Stocks $14,176,500Inventories $2,225,000Net Equipment $17,575,000Currently the stocks are selling for a price equal to its bookvalue and bonds are selling at par. It is estimated that thestockholders require a return of 13% while the yield to maturity onbonds are 9%. The company faces a marginal tax rate of 34%. What isthe weighted average cost of capital for this firm?7.95%10.53%8.41%9.31%
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