Module Eight Activity Worksheet

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 Zonks 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 Zonks 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 Zonks weighted-average cost of capital: A. 79% B. 78.3% C. 41.8% D. 50% Question 4: Using the above information, calculate Zonks 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%

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