Accounting Help: Winter's Toyland

Sunday, November 10, 2019

Winter's Toyland has a debt-equity ratio of 0.65. The pre-tax cost of debt is 8.7 percent and the required return on assets is 16.1 percent

Winter's Toyland has a debt-equity ratio of 0.65. The pre-tax cost of debt is 8.7 percent and the required return on assets is 16.1 percent. What is the cost of equity if you ignore taxes?

A.	19.31 percent

B.	19.74 percent

C.	20.29 percent

D.	20.46 percent

E.	20.91 percent

R_E = 0.161 + (0.161 - 0.087) × 0.65 = 20.91 percent

64.

Jefferson & Daughter has a cost of equity of 14.6 percent and a pre-tax cost of debt of 7.8 percent. The required return on the assets is 13.2 percent. What is the firm's debt-equity ratio based on M & M II with no taxes?

0.26

0.33

0.37

0.43

0.45

R_E = 0.146 = 0.132 + (0.132 - 0.078) × D/E; D/E = 0.26

65.

The Corner Bakery has a debt-equity ratio of 0.62. The firm's required return on assets is 14.2 percent and its cost of equity is 16.1 percent. What is the pre-tax cost of debt based on M & M Proposition II with no taxes?

A.	7.10 percent

B.	10.68 percent

C.	11.14 percent

D.	17.56 percent

E.	18.40 percent

R_E = 0.161 = 0.142 + (0.142 - R_d) × 0.62; R_d = 11.14 percent

Stacy owns 38 percent of The Town Centre. She has decided to retire and wants to sell all of her shares in this closely held

Stacy owns 38 percent of The Town Centre. She has decided to retire and wants to sell all of her shares in this closely held, all equity firm. The other shareholders have agreed to have the firm borrow $650,000 to purchase her shares of stock. What is the total market value of The Town Centre? Ignore taxes.

A.	$1,710,526

B.	$1,748,219

C.	$1,771,089

D.	$1,801,406

E.	$1,808,649

Firm value = $650,000/0.38 = $1,710,526

63.