As a Newly Hired Financial Analyst, Your First Job at VersaLife

question 25

Multiple Choice

As a newly hired financial analyst, your first job at VersaLife Corporation is to calculate the company's cost of capital. The present capital structure, which is considered optimal, is as follows: $$\begin{array} { | c | c | } \hline & \text { Market Value } \\\hline \text { Debt } & \$ 80 \text { million } \\\hline \text { Preferred Stock } & \$ 10 \text { million } \\\hline \begin{array} { c } \text { Common } \\\text { Equity }\end{array} & \$ 110 \text { million } \\\hline \text { Total Capital } & \$ 200 \text { million } \\\hline\end{array}$$ If VersaLife Corporation issues new debt, then the bond market expects a yield of 7.5%. Preferred stock is trading for $96, has a $100 par value and pays an annual dividend of 8% (the next dividend is due in one year) . Common equity has a beta of 1.20, the market risk premium is 5%, and the risk-free rate is 3%. If the firm's tax rate is 40%, what is the weighted average cost of capital? Round answers to the nearest tenth.

• A)7.2%
• B)7.5%
• C)8.2%
• D)8.5%
• E)9.0%

Grasp the concept and application of judicial review in assessing government actions against the U.S. Constitution.

Recognize the protections offered by the Contract Clause of the Constitution against retroactive modifications.

Identify circumstances under which state legislation can conflict with federal law.

Comprehend the federal government's authority in economic matters stemming from the Commerce Clause.

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Definitions:

Liquidation Expenses

Costs associated with winding up a company's operations, selling off assets, and paying off creditors in the event of liquidation or bankruptcy.

Profits and Losses

The financial results of a company's operations, indicating the net money made or lost within a specific period.

Liquidation Expenses

Costs associated with winding down a company's operations, including paying off debts and distributing remaining assets to shareholders.

Capital Account Balances

The value held within capital accounts, reflecting the total equity contributions and adjustments from income, losses, and withdrawals by owners.