Finance Chapter 14 Homework

Walker Systems has an issue of preferred stock outstanding with a stated annual dividend of $2.60 that just sold for $23.85 per share. What is the bank's cost of preferred stock? 8.39% 10.90% 7.06% 2.51% 9.17%

10.90%

Espy Hotels has bonds outstanding that mature in 9 years, pay interest semiannually, and have a coupon rate of 5.5 percent. These bonds have a face value of $1,000 and a current market price of $989.28. What is the company's aftertax cost of debt if its tax rate is 22 percent? 5.61% 2.19% 4.37% 5.65% 4.41%

4.41%

DEF Corporation had two issues of ordinary preferred stock with a $100 par value traded on the NYSE. One issue paid $5.56 annually per share and sold for $95.55 per share. The other paid $5.88 per share annually and sold for $97.50 per share. What is DEF's Corporation's cost of preferred stock? 5.82% 5.93% 6.03% 6.50% 6.63%

5.93%

The Downtowner has 168,000 shares of common stock outstanding valued at $53 per share along with 13,000 bonds selling for $1,008 each. What weight should be given to the debt when the company computes its weighted average cost of capital? 46.67% 65.05% 51.79% 59.54% 48.27%

59.54%

For the Dividend Growth Model, the equation can be written as follows: P0 = =D1/(RE - g). How can this equation be rearranged? RE = D1/g + P0 RE = D1 * P0 + g RE = D1/P0 + g RE = g /P0 + D1 RE = P0/D1 + g

RE = D1/P0 + g

Wright Market Research is able to borrow money at a rate of 6.8 percent per year. This interest rate is called the: compound rate. current yield. cost of debt. capital gains yield. cost of capital.

cost of debt.

The required return of preferred stock is equal to the ________ ________ on the preferred stock. fixed dividend current price bond rating perpetuity rating dividend yield

dividend yield

Since preferred stock has a fixed dividend paid every period forever, it is essentially a perpetuity (t/f).

true

Kelley Couriers just paid its annual dividend of $5.25 per share. The stock has a market price of $58.25 and a beta of 1.2. The return on the U.S. Treasury bill is 1 percent and the market risk premium is 8.5 percent. What is the cost of equity? 8.8% 10.0% 10.2% 8.5% 11.2%

11.2%

What is the cost of equity for the TMB Corporation based on the following information? Risk premium = 5% Risk free rate = 4% TMB beta: 1.50 7.5% 7.95% 11.50% 13.50% 13.95%

11.50%

*Grill Works has 6 percent preferred stock outstanding that is currently selling for $49 per share. The market rate of return is 14 percent and the tax rate is 21 percent. What is the cost of preferred stock if its stated value is $100 per share? 12.77% 12.29% 12.67% 12.24% 12.54%

12.24%

*ABC Corporation has 2.8 million shares of stock outstanding. The stock currently sells for $50 per share. The firm's debt is publically traded and was recently quoted at 95 percent of its face value. It has a total face value of $10 million, and it is currently priced to yield 12 percent. The risk-free rate is 5 percent, and the market risk premium is 7 percent. You've estimated that ABC has a beta of 1.25. If the corporate tax rate is 35 percent, what is the WACC of ABC Corporation? 9.38% 10.88% 11.38% 12.88% 13.38%

13.38%

If ABC corporation paid a dividend of $6 per share last year. The stock currently sells for $80 per share. You estimate that the dividend will grow steadily at a rate of 6% per year into the indefinite future. What is the cost of equity? 7.5% 7.95% 11.50% 13.50% 13.95%

13.95%

*The Shoe Outlet has paid annual dividends of $.58, $.66, $.72, and $.75 per share over the last four years, respectively. The stock is currently selling for $10.08 per share. What is the cost of equity? 18.74% 17.13% 10.38% 19.53% 11.79%

17.13%

Food Shoppe Galore had the following information: Total market value of a company's stock: $650 million Total market value of the company's debt: $150 million What is the weighted average of the company's debt? 18.75% 40.75% 55.75% 81.25% 90.50%

18.75%

Castillo Corporation common stock is currently priced at $39.75 per share. The company just paid $4.35 per share as its annual dividend. The dividends have been increasing by 7.5 percent annually and are expected to continue doing the same. What is the cost of equity? 19.26% 8.25% 18.44% 10.92% 11.74%

19.26%

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? 20.15% 22.51% 17.69% 19.47% 21.93%

19.47%

Jiminy's Cricket Farm issued a 20-year, 7 percent, semiannual bond four years ago. The bond currently sells for 108 percent of its face value. What is the aftertax cost of debt if the company's combined tax rate is 23 percent? 4.96% 4.78% 4.15% 4.12% 3.86%

4.78%

Theresa's Flower Garden has 650 bonds outstanding that are selling for $1,007 each, 2,100 shares of preferred stock with a market price of $68 per share, and 42,000 shares of common stock valued at $44 per share. What weight should be assigned to the preferred stock when computing the weighted average cost of capital? 6.08% 5.40% 6.67% 5.00% 5.75%

5.40%

Montez Supply is expected to pay an annual dividend of $.95 per share next year. The market price of the stock is $43.50 and the growth rate is 4.5 percent. What is the cost of equity? 2.28% 6.68% 8.69% 6.78% 2.18%

6.68%

*Phillips Equipment has 6,500 bonds outstanding that are selling at 96.5 percent of par. Bonds with similar characteristics are yielding 6.7 percent, pretax. The company also has 48,000 shares of 5.5 percent preferred stock and 75,000 shares of common stock outstanding. The preferred stock sells for $64 per share. The common stock has a beta of 1.32 and sells for $41 per share. The preferred stock has a stated value of $100. The U.S. Treasury bill is yielding 2.2 percent and the return on the market is 10.6 percent. The corporate tax rate is 21 percent. What is the weighted average cost of capital? 8.09% 8.64% 10.18% 9.30% 10.56%

8.09%

Suppose a corporation issued a 20-year annual, 7 percent bond, 10 years ago. The bond is currently selling for 92 percent of its face value, or $920. What is the corporation's cost of debt? 8.01% 8.20% 8.42% 8.48% 8.63%

8.20%

Suppose a corporation issued a 30-year annual, 8 percent bond, 10 years ago. The bond is currently selling for 95 percent of its face value, or $950. What is the corporation's cost of debt? 8.01% 8.12% 8.42% 8.53% 8.63%

8.53%

*Deep Mines has 43,800 shares of common stock outstanding with a beta of 1.54 and a market price of $51 per share. There are 10,000 shares of 7 percent preferred stock outstanding with a stated value of $100 per share and a market value of $83 per share. The 8 percent semiannual bonds have a face value of $1,000 and are selling at 96 percent of par. There are 5,000 bonds outstanding that mature in 13 years. The market risk premium is 7.5 percent, T-bills are yielding 3.6 percent, and the tax rate is 21 percent. What discount rate should the firm apply to a new project's cash flows if the project has the same risk as the company's typical project? 9.59% 8.72% 9.17% 8.28% 9.30%

9.30%

Assume a firm utilizes the security market line approach to determine the cost of equity. If the firm currently pays an annual dividend of $2.40 per share and has a beta of 1.42, all else constant, which of the following actions will decrease the firm's cost of equity? A decrease in the dividend amount An increase in the dividend amount An increase in the market rate of return A decrease in the firm's beta A decrease in the risk-free rate

A decrease in the firm's beta

Which of the following statements regarding the cost of preferred stock is accurate? It equals the dividend yield. It equals the yield to maturity. It is highly dependent on the dividend growth rate. It is independent of the preferred stock's price. It decreases when tax rates increase.

It equals the dividend yield.

*Which of the following statements regarding a firm's pretax cost of debt is accurate? It is based on the current yield to maturity of the company's outstanding bonds. It is equal to the coupon rate on the latest bonds issued by the company. It is equivalent to the average current yield on all of a company's outstanding bonds. It is based on the original yield to maturity on the latest bonds issued by a company. It must be estimated as it cannot be directly observed in the market.

It is based on the current yield to maturity of the company's outstanding bonds.

Which of the following statements regarding the weighted average cost of capital is accurate? It equals the aftertax cost of the outstanding liabilities. It should be used as the required return when analyzing any new project. It is the return investors require on the total assets of the firm. It remains constant when the debt-equity ratio changes. It is unaffected by changes in corporate tax rates.

It is the return investors require on the total assets of the firm.

With respect to capital project analysis, which of the following statements is accurate? The subjective approach assigns a discount rate to each project based on other companies in the same category as the project. Overall, a company makes better decisions when it uses the subjective approach than when it uses its WACC as the discount rate for all projects. Companies will correctly accept or reject every project if they adopt the subjective approach. Mandatory projects should only be accepted if they produce a positive NPV when the overall company WACC is used as the discount rate. The pure play approach should only be used with low-risk projects.

Overall, a company makes better decisions when it uses the subjective approach than when it uses its WACC as the discount rate for all projects.

Which of the following is the main advantage of using the dividend growth model to estimate a firm's cost of equity? The ability to apply either current or future tax rates. The model's applicability to all corporations. The model's consideration of risk. The stability of the computed cost of equity over time. The simplicity of the model.

The simplicity of the model.

A firm's target capital structure represents: the cost of equity to achieve the desired NPV. the cost of debt to achieve the desired NPV. a fixed debt-equity ratio that the company attempts to maintain. a fixed cost of capital that the company maintains. the required return for the project with the highest NPV.

a fixed debt-equity ratio that the company attempts to maintain.

*When calculating a firm's weighted average cost of capital, the capital structure weights: are based on the book values of debt and equity. are based on the market values of the outstanding securities. depend upon the financing obtained to fund each specific project. remain constant over time unless new securities are issued or outstanding securities are redeemed. are restricted to debt and common stock.

are based on the market values of the outstanding securities.

When calculating a firm's weighted average cost of capital, the capital structure weights: are based on the book values of debt and equity. are based on the market values of the outstanding securities. depend upon the financing obtained to fund each specific project. remain constant over time unless new securities are issued or outstanding securities are redeemed. are restricted to debt and common stock.

are based on the market values of the outstanding securities.

*Okonjo Economics has a debt-equity ratio of .38. All of the firm's outstanding shares were purchased by a small number of investors. The return these investors require is called the: dividend yield. cost of equity. capital gains yield. cost of capital. income return.

cost of equity.

*A firm's aftertax cost of debt will increase if there is a(n): decrease in the company's debt-equity ratio. decrease in the company's tax rate. increase in the credit rating of the company's bonds. increase in the company's beta. decrease in the market rate of interest.

decrease in the company's tax rate.

When evaluating any capital project proposal, the cost of capital: is determined by the overall risk level of the firm. is dependent upon the source of the funds obtained to fund that project. is dependent upon the firm's overall capital structure. should be applied as the discount rate for all other projects considered by the firm. depends upon how the funds raised for that project are going to be spent.

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

The cost of capital depends primarily on the source of the funds, not the use (t/f).

false

The coupon rate on the firm's outstanding debt can be used as a substitute for the cost of debt (t/f).

false

The percent of investment that the project costs can be referred to as all of the following, except: required return appropriate discount rate cost of money free cash flow cost of capital

free cash flow

The cost of preferred stock is equivalent to the: pretax cost of debt. rate of return on an annuity. aftertax cost of debt. rate of return on a perpetuity. cost of an irregular growth common stock.

rate of return on a perpetuity.

To determine a firm's cost of capital, one must include: only the return required by the firm's current shareholders. only the current market rate of return on equity shares. the weighted costs of all future funding sources. the returns currently required by both debtholders and stockholders. the company's original debt-equity ratio.

the returns currently required by both debtholders and stockholders.