81. A convertible bond has a face value of $1,000 and a conversion price of $22.50. The
bond has a 6 percent coupon and pays interest semi-annually. The bond matures in six years.
Similar bonds are yielding 7 percent. The current price of the stock is $21.24. What is the
conversion value of this bond?
$944.00
Conversion value = $1,000  $22.50  $21.24 = $944.00
82. The weighted average of the firm’s costs of equity, preferred stock, and aftertax debt is
the:
weighted average cost of capital (WACC).
83. The capital structure weights used in computing the weighted average cost of capital
are:
based on the market value of the firm’s debt and equity securities.
84. When a firm has flotation costs equal to 6 percent of the funding need, it should:
increase the initial project cost by dividing that cost by (1  .06).
85. Blackwater Adventures has a bond issue outstanding that matures in sixteen years. The
bonds pay interest semi-annually. Currently, the bonds are quoted at 103 percent of
face value and carry a 9 percent coupon. The firm’s tax rate is 34 percent. What is
the firm’s after-tax cost of debt?
5.71 percent
Enter
162 2/
1030
90/2
N I/Y PV PMT
FV
Solve for
8.65
After-tax Rd = 8.65 percent  (1  .34) = 5.71 percent
1000
86. The Abco Co. maintains a debt-equity ratio of .70 and has a tax rate of 39 percent. The
firm does not issue preferred stock. The cost of equity is 12 percent and the
after-tax cost of debt is 5 percent. What is Abco’s weighted average cost of capital?
9.1 percent
Debt = .7; Equity = 1.0; Total = .7 + 1.0 = 1.7; Debt-equity ratio = .7  1.0 = .7
 1.0
  .7

WACC  
 .12   
 .05)   .070588  .020588  .091176 = 9.1 percent
 1.7
  1.7

87. Tony’s Pizza is considering a new project that they consider to be a little riskier than
their current operations. Thus, management has decided to add an additional 2
percent to their company’s overall cost of capital when evaluating this project. The
project has an initial cash outlay of $42,000 and projected cash inflows of $15,000
in year one, $25,000 in year two, and $12,000 in year three. The firm uses 35
percent debt and 65 percent common stock as their capital structure. The
company’s cost of equity is 13 percent while the after-tax cost of debt for the firm
is 6 percent. What is the projected net present value of the new project?
-$520.29
WACCFirm = (.65  .13) + (.35  .06) = .0845+.021= .1055
WACCProject =.1055 +.02 = .1255
$15,000 $25,000 $12,000
NPV  $42,000 


 $42,000  $13,327.41
1.12551 1.12552 1.12553
 $19,735.54  $8,416.76  $520.29
The following balance sheet and income statement should be used for questions #88 through #100:
J, Inc.
2005 Income Statement
($ in millions)
Net sales
Less: Cost of goods sold
Less: Depreciation
Earnings before interest and taxes
Less: Interest paid
Taxable Income
Less: Taxes
Net income
$9,790
6,870
520
2,400
140
$ 2,260
791
$ 1,469
J, Inc.
2004 and 2005 Balance Sheets
($ in millions)
2004
2005
2004
2005
Cash
$130 $150
Accounts payable
$1,320 $1,450
Accounts rec.
1,070
1,250
Long-term debt
760
1,170
Inventory
1,520
1,080 Common stock
4,200
3,700
Total
$2,720
$2,480 Retained earnings
570
860
Net fixed assets
4,130
4,700
Total assets
$6,850 $7,180
Total liabilities & equity $6,850 $7,180
88.What is the current ratio for 2005?
1.71
2480/1450=1.71
89.What is the quick ratio for 2005?
.0.97
(150+1250)/1450=0.97
90.What is the debt-equity ratio for 2005?
0.57
(1450+1170)/(3700+860)=0.57