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1. All of the below provide a valid reason for why the cost of debt is lower than the cost of equity, EXCEPT:

1. Using debt leads to a tax saving, while using equity does not
2. There is typically a variety of bonds issued by a corporation with different maturities and features, all resulting in a different interest rate.
3. In the case of bankruptcy, debtholder claims are satisfied prior to those of the shareholders.
4. The cash flows expected by the debtholders are less uncertain than the cash flows expected by the shareholders.

2. Which of the following would increase the weighted average cost of capital?

1. a decrease in the interest rate the company pays on its debt
2. a decrease in the rate of return expected by the shareholders on investment in the company's equity
3. a decrease in the amount of equity, relative to debt used to fund company's projects
4. a decrease in the tax rate the company faces

3. (NOTE: ENTER YOUR ANSWER IN PERCENT, BUT WITHOUT THE % SIGN, rounded to 2 decimal places, for instance as 7.89, not as 7.89%, or not as 0.0789) DO NOT ROUND IN YOUR CALCULATION STEPS (USE CALCULATOR MEMORY FUNCTIONS) Thunder Inc. needs to determine its equity cost. Thunder's stock beta is estimated to be equal to 2. Assuming the market premium equals 9.3%, and a risk-free rate of 1.7%, calculate Thunder's cost of equity.

Answer:

4. (NOTE: ENTER YOUR ANSWER IN PERCENT, BUT WITHOUT THE % SIGN, rounded to 2 decimal places, for instance as 7.89, not as 7.89%, or not as 0.0789) DO NOT ROUND IN YOUR CALCULATION STEPS (USE CALCULATOR MEMORY FUNCTIONS) Calipso Beverages has 200,000 shares of stock outstanding, with one share selling for $290 in the stock market. Calipso's shareholders expect a 17% return on their investment. All of the company's debt comes from a $13 million loan it received 5 years ago. The entire loan is to be repaid with a single $13 million payment 10 years from now. Meanwhile, Calipso is making annual interest payments equal to $400,000. Assuming Calipso faces a 18% tax rate, calculate Calipso's weighted average cost of capital

Answer:

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