Introduction to Finance

11. 
Challenge Problem
Use various Internet resources and informa-
tion contained in this text to estimate the cost of debt, cost of retained 
earnings, the cost of new equity, and the WACC for the following fi rms: 
Walgreens, Microsoft, and ExxonMobil. As an approximation, use current 
book value ratios as estimates of their target capital structure weights.
12. 
Challenge Problem 
Through library or Internet resources, fi nd 
information regarding the sources of long-term fi nancing for AT&T. 
What are the current market prices for its outstanding bonds and 
stock? Estimate its current market value weights. Estimate the cost of 
each fi nancing source and, assuming the current market value weights 
equal AT&T’s target capital structure, estimate its weighted average 
cost of capital.
13. 
Derive equation 18-8 for the internal growth rate. Let S = last 
year’s sales revenue; A = last year’s total assets; D = last year’s total 
liabilities; E = last year’s stockholder’s equity; NI/S = the fi rm’s (pre-
sumably constant) profi t margin, the ratio of net income to sales; 
g
= 
the fi rm’s expected sales growth rate; and RR = the fi rm’s (presum-
ably constant) retention ratio.
Using these symbols and relationships you are familiar with, 
fi nd the following:
a. 
What will this year’s net income equal?
b. 
How much will be added to stockholder’s equity this year?
c. 
What is this year’s level of assets?
d. 
What is the change in assets between last year and this year?
e. 
The change in assets computed in (d) has to be fi nanced.
Assuming only internal fi nancing is available; compute the fi rm’s 
internal growth rate. (Hint: Set your answers to (b) and (d) equal to 
each other, and solve for g, the growth rate.)
14. 
Using the same notation used in the previous problem, assume the 
fi rm will raise some funds externally to keep the fi rm’s debt/equity 
(D/E) ratio constant.