Finance 301 - Chapter 9 & 14

When calculating a firm's weighted average cost of capital, the capital structure weights:

are based on the market values of the outstanding securities.

When evaluating any capital project proposal, the cost of capital: (CH 14)

depends upon how the funds raised for that project are going to be spent.

Assume a firm has a debt-equity ratio of .48. The firm's cost of equity is: (CH 14)

directly related to the risk level of the firm.

The stock in Bowie Enterprises has a beta of .92. The expected return on the market is 12.20 percent and the risk-free rate is 3.15 percent. What is the required return on the company's stock? (CH 14)

11.48% (found using Risk-Free Rate of Return + Beta (Market Rate of Return - Risk-Free Rate of Return))

Nguyen Corporation's common stock has a beta of 1.38. The risk-free rate is 1.78 percent and the expected return on the market is 14.6 percent. What is the cost of equity? (CH 14)

19.47% (found using Risk-Free Rate of Return + Beta (Market Rate of Return - Risk-Free Rate of Return))

Too Young, Incorporated, has a bond outstanding with a coupon rate of 6.2 percent and semiannual payments. The bond currently sells for $1,954 and matures in 22 years. The par value is $2,000. What is the company's pretax cost of debt? (CH 14)

6.40% (N, PMT, PV, FV, solve for I/Y)

To determine a firm's cost of capital, one must include: (CH 14)

the returns currently required by both debtholders and stockholders.

When determining a firm's cost of capital, the most important determinant is the: (CH 14)

use of the funds raised.

Countess Corporation is expected to pay an annual dividend of $4.45 on its common stock in one year. The current stock price is $72.55 per share. The company announced that it will increase its dividend by 3.60 percent annually. What is the company's cost of equity? (CH 14)

9.73% (found using (Dividend Per Share / Stock Price Per Share) + Growth Rate Dividend)

Incorporating flotation costs into the analysis of a project will: (CH 14)

increase the initial cash outflow of the project.