Finance Practice Problems

PROBLEM:

The director of capital budgeting for XYZ, Inc. manufacturers of playground equipment, is considering a plan to expand production facilities in order to meet an increase in demand. He estimates that this expansion will produce a rate of return of 12%. The firm’s target capital structure calls for a debt ratio of 34%. See-Saw currently has a bond issue outstanding which will mature in 12 years and has a 15% annual coupon rate. The bonds are currently selling for $1,527.53. The firm has maintained a constant growth rate of 3%. See-Saw’s most recent dividend is $3.9 and its current stock price is $32.00. Its tax rate is 40%. What is the firm's Weighted Average Cost of Capital (WACC)? (Assume that there is no preferred stock outstanding.)

ANSWER:
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