Margo Corporation is a major producer of lawn care products. Its stock is currently selling at $8 per share

1 Margo Corporation is a major producer of lawn care products. Its stock is currently selling at $8 per share; there are 10.5 million shares outstanding. Margo also has debt outstanding with a book value of $400 million. Margo bonds currently yield 10% and trade at 90% of the book value. The risk-free rate is 8%, the market risk premium is 9%, and Margo has beta equal to 2. Margo’s tax rate is 34%.a )Determine the cost of equity using the SML.b) Calculate the weighted average cost of capital for Margo.2 Stan is expanding his business and plans to sell common stock for the needed funds. If the current risk-free rate is 4% and the expected market return is 12%, what is the cost of equity if the beta of the stock is a) 0.75 b) 0.90 c) 1.05 d) 1.20?3 Eric has an idea for a business venture. He plans to borrow $2,000 from Mike who is asking for 6% interest on the loan, he will ask Kyle to lend him $1,500 at 8% interest, and he will borrow $800 from Debbie at 14% interest. What will be Eric’s weighted average cost of capital? 4. Which of the following would be classified as debt lenders for a company? a) Common shareholders, preferred shareholders, commercial banks b) Preferred shareholders, banks, mortgage companies c) Suppliers, common shareholders, mortgage companies d) Commercial banks, mortgage companies, suppliers e) None of the above 5. The cost of debt could be which of the following? a) The required return on money borrowed as a long-term loan from a bank b) The required return on money borrowed from a family member c) The yield to maturity on money raised by selling bonds d) All of the above e) a and b only 6. Best Buy has preferred stock that pays a current dividend of $3.00 annually and currently its price on the market is $39.50. You expect the economy to continue to grow at its current pace of 2.0% annually for the foreseeable future. What is the market required rate of return on this preferred stock? a) 10.82% b) 7.59% c) 10.82 d) 7.00% e) none of the above 7. ____ refers to the way a company finances itself through some combination of loans, bonds,preferred stock, common stock and retained earnings. a) cost of capital b) capital structure c) working capital d) strategic financing e) none of the above 8. The Nutrex Corporation wants to calculate its weighted average cost of capital. Its desired capital structure weights are 40% long-term debt and 60% common equity. The before-tax cost of debt is 10% and Nutrex is in the 40% tax bracket. The current rate of interest is 8% on Treasury Bills. The expected return on Standard and Poor’s 500 Index is 13% and the company’s beta is 1.8. 9. The Dakota Biotech Corporation wants to determine its after-tax cost of capital. The company’s debt-equity ratio is 0.92. The before-tax cost of debt is 6.75% with a 30% tax rate. The return on Treasury Bills currently is 8% and the cost of equity is 14.5%. 10. Safeway Stores issued a 15-year bond 5 years ago; it has $1,000 face value and a 7% couponrate. If the bond currently sells on the market for $933 and the company is in the 30% tax bracket, what is the after-tax cost of debt? 11. A company issues a bond today with a $1,000 face value, an 8% coupon rate and 15-yearmaturity. An investor buys the bond on the market currently at $591. What is the yield to maturity (required rate of return)? 12. Calculate the value of a bond that expects to mature in 14 years and has a $1,000 face value.The coupon interest rate is 7%, and the investor’s required rate of return is 10%. 13. The purpose of bond ratings is to, a) convey a message about the creditworthiness and default risk of a company. b) signal to the investment community about the financial stability and strength of a company. c) satisfy the Trust Indenture Act. d) all of the above e) a and b only