Daves Inc Recently Hired You as a Consultant to Estimate the the Company's

question 28

Multiple Choice

Daves Inc. recently hired you as a consultant to estimate the company's WACC. You have obtained the following information. (1) The firm's noncallable bonds mature in 20 years, have an 8.00% annual coupon, a par value of $1,000, and a market price of $1,050.00. (2) The company's tax rate is 40%. (3) The risk-free rate is 4.50%, the market risk premium is 5.50%, and the stock's beta is 1.20. (4) The target capital structure consists of 35% debt and the balance is common equity. The firm uses the CAPM to estimate the cost of common stock, and it does not expect to issue any new shares. What is its WACC?

• A) 7.16%
• B) 7.54%
• C) 7.93%
• D) 8.35%
• E) 8.79%

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Definitions:

EPS Information

Earnings Per Share; a financial metric that represents the portion of a company's profit allocated to each outstanding share of common stock.

Operating Activities

The portion of a company's cash flow statement that details the cash generated or used in the company's primary business operations, excluding investing and financing activities.

Depreciation Expense

The allocated amount of an asset's cost expensed over its useful life to account for the decline in its value due to wear and tear.

Loss on Sale

The financial loss incurred when the selling price of an asset is less than its carrying amount at the time of sale.