Calculating Cost of Debt: Shanken Corp. issued a 30-year, 6.2 percent semi-annual bond 7 years ago.

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Question 1 10 points

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1 Calculating Cost of Equity: The Dybvig Corporation’s common stock has a beta of 1.21. If the risk- free rate is 3.5 percent and the expected return on the market is 11 percent, what is Dybvig’s cost of equity capital?

Question 2 -10 points

Calculating Cost of Debt: Shanken Corp. issued a 30-year, 6.2 percent semi-annual bond 7 years ago. The bond currently sells for 108 percent of its face value. The company’s tax rate is 35 percent

(a.) What is the pretax cost of debt?

(b). What is the aftertax cost of debt?

(c) Which is more relevant, the pre-tax or the after-tax cost of debt? Why?

Question 3 – 15 points

Calculating WACC Mullineaux Corporation has a target capital structure of 70 percent common stock and 30 percent debt. Its cost of equity is 13 percent, and the cost of debt is 6 percent. The relevant tax rate is 35 percent. What is Mullineaux’s WACC?

Question 4 – 65 points

Kellogg’s wants to expand its cereal business by acquiring Major foods company. Kellogg’s currently has debt outstanding with a market value of $150 million and a YTM of 7 percent. The company’s market capitalization is $390 million, and the required return on equity is 12 percent. Major foods has debt outstanding with a market value of $32 million. The EBIT for Major Foods is projected to be $14 million. EBIT is expected to grow at 11 percent per year for the next five years before slowing to 2 % in perpetuity. Net working capital, capital spending, and depreciation as a percentage of EBIT are expected to be 10 percent, 15 percent, and 9 percent, respectively. Major Foods has 2 million shares outstanding, and the tax rate for both companies is 40 percent.

(a). What is the maximum share price do you think Kellogg’s should to pay for Major foods stock.

(b.) Would you recommend that Kellogg’s purchase Major foods? Why?

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