Question

The alternates given in the questions are giving approximate answer not exact answers

MBA 520 Module Eight Activity Worksheet

Prompt: After reviewing the data in the table, respond to the problems below. Indicate the answer you believe is correct.

Zonk Corporation Data

Total assets	$7,460
Interest-bearing debt	$3,652
Average pretax borrowing cost	10.5%
Common equity:
Book value	$2,950
Market value	$13,685
Income tax rate	35%
Market equity beta	1.13

Question 1: Assuming that the riskless rate is 2.3% and the market premium is 5.3%, calculate Zonk’s cost of equity capital:

A. 10.4%

B. 7.69%

C. 11.89%

D. 8.28%

Question 2: Determine the weight on debt capital that should be used to calculate Zonk’s weighted-average cost of capital:

A. 21.7%

B. 21%

C. 50%

D. 58.2%

Question 3: Determine the weight on equity capital that should be used to calculate Zonk’s weighted-average cost of capital:

A. 79%

B. 78.3%

C. 41.8%

D. 50%

Question 4: Using the above information, calculate Zonk’s weighted-average cost of capital:

A. 11.5%

B. 7.97%

C. 7.48%

D. 10.90%

Question 5: Assume that Zonk is a potential leveraged buyout candidate. Assume that the buyer intends to put in place a capital structure that has 70 percent debt with a pretax borrowing cost of 14 percent and 30 percent common equity. Compute the revised equity beta for Zonk based on the new capital structure.

A. 4.35

B. 4.34

C. 2.84

D. 3.91

Question 6: Assume that Zonk is a potential leveraged buyout candidate. Assume that the buyer intends to put in place a capital structure that has 70 percent debt with a pretax borrowing cost of 14 percent and 30 percent common equity. Compute the weighted average cost of capital for Zonk based on the new capital structure.

A. 8.85%

B. 12.56%

C. 13.01%

D. 9.94%

Answer 1

Part 1

Option D

D. 8.28%

Cost of equity capital = risk free rate + (beta * market premium) = 2.3%+(1.13*5.3%) = 8.28%

Part 2

Option B

B. 21%

weight on debt capital = market value of debt / total market value = 3652/(3652+13685) = 21%

Part 3

weight on equity capital = market value of equity / total market value = 13685/(3652+13685) = 79%

Part 4

Option B

B. 7.97%

weighted-average cost of capital = (weight on debt capital* cost of debt*(1-t))+( weight on equity capital * cost of equity) = (21%*10.5%*(1-35%))+(79%*8.28%) = 7.97%

Part 5

Option A

A. 4.35

Levered market equity beta = unlevered market equity beta (1 + (1-t) [MV debt\MV equity])

=1.13*(1+(1-35%)*(0.70/0.30)) = 1.13*(1.65*0.70/0.30) = 4.35

Part 6

Option A

A. 8.85%

New WACC = (70%*14%*(1-35%))+(30%*8.28%) = 8.85%