Reference no: EM132951834

Questions -

Q1. Jerry Corporation has 400,000 bonds outstanding that are trading at $950. In addition, Jerry has 6,000,000 million shares of common stock outstanding at $82. What are the market weightings for Jerry Corporation?

Q2. Sally Corporation is financed with 40% debt and 60% common equity. They estimate that their after-tax cost of debt is 6% and their cost of common equity is 9%. What is Sally's weighted average cost of capital?

Q3. Alice Corporations has two divisions. The one in the high-risk industry has a beta of 1.5 and can be financed optimally in line with others in the industry at 25% debt and 75% equity. The low risk division has a beta of .8 and based on industry averages, can be financed optimally at 50% debt and 50% equity. Assuming the risk-free rate of return on 10-year government securities is 2.7% and the market risk premium is 5%. What is the estimated cost of common equity for the high-risk division?

Q4. Continuing from the prior problem, what is the estimated after-tax cost of equity for the low-risk division?

Q5. Still working with Alice Corporation and the information from the prior two problems, assume that the after-tax cost of debt for the high-risk division is 6% and the after-tax costs of debt for the low-risk division is 5%. What are the weighted average divisional costs of capital for each division?