1. Biscuitville is a fast-food chain which prides itself on never having taken a loan. All its capital has been raised either through retained earnings or by issuing stock. Would this chapter suggest that’s the best way to go? Either way, explain.
2. I read the chapter’s descriptions of “capital structure” and “financial policy” several times, and still couldn’t tell them apart. So I went to good ol’ http://www.investopedia.com to see how they defined these terms. Check it out, and describe whether/how it helps.
3. In reviewing the chapter’s “the cost of debt,” equation 9-1 shows “bondholder’s required rate of return (rb)” in the denominators. What’s the different term we used for that rate, back in the bond chapter?
4. In reviewing the chapter’s “the cost of debt,” equations 9-1 and 9-2 show “interest paid in year 1” in the numerators. What’s the different term we used for that numerator, back in the bond chapter?
5. Equation 9-2: There are six variables in this equation: “net proceeds per bond,” “cost of debt capital or kb,” “interest paid in year 1,” “interest paid in year 2,” “interest paid in year 3,” and “principal.” To do what the text is describing, which variable is solved for absolutely last?
6. Right after showing equation 9-2. the chapter shows an equation for including flotation costs when calculating the cost of equity capital. The numerator is called the “investor’s required rate of return.” What two methods for estimating this rate does the chapter offer?
7. If a corporations coupons paid during 2021 is the same amount as the company’s operating income during 2021, then judging just by 2021, how much will the corporation owe in taxes? (Assume an overall tax rate of 30%.)
8. According to chapter 3 and the chapter 3 handout, if a corporation pays $10,500,000 in dividends, then how much did it also pay in taxes?
9. Equation 9-5 features “net proceeds per preferred share.” Is this a book value or a market value?
10. In my professional opinion, there’s a mistake in Example 9.2 which I’d like you to correct. I agree with the example all the way until the last sentence of “Step 3.” 7.44%, sure, is the ongoing cost of the preferred stock, as mentioned in Step 2. But it’s not also the cost of selling the preferred stock as implied by the final sentence. If you had to pay $1.375 in order to receive $58.50, then what is the corrected cost (in % terms) of selling the preferred stock?
11. In the section “The Weighted Average Cost of Capital,” and in the subsection “Capital Structure Weights,” the text states “Thus, for the calculated cost of capital to be meaningful, it must correspond directly to the riskiness of the particular project being analyzed.” Wait, what project? Does that paragraph (because projects are mentioned a second time) agree with or conflict with Table 9-5? Explain.
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