FNAN 300 Chapter 12 Homework

In an efficient market, the cost of equity for a highly risky firm:

increases in direct relation to the stock's systematic risk.

A firm has a cost of equity of 13 percent, a cost of preferred of 11 percent, an aftertax cost of debt of 5.2 percent, and a tax rate of 35 percent. Given this, which one of the following will increase the firm's weighted average cost of capital?

increasing the firms beta

The common stock of Serenity Homescapes has a beta of 1.21 and a standard deviation of 17.8 percent. The market rate of return is 13.5 percent and the risk-free rate is 3.2 percent. What is the cost of equity for this firm?

13.82%

Electronic Products has 22,500 bonds outstanding that are currently quoted at 101.6. The bonds mature in 8 years and pay an annual coupon payment of $90. What is the firm's aftertax cost of debt if the applicable tax rate is 34 percent?

5.75%

Spartans has 6.5 percent bonds outstanding that mature in 18 years. The bonds pay interest semiannually and have a face value of $1,000. Currently, the bonds are selling for $985 each. What is the firm's pretax cost of debt?

6.64%

KellyAnne Public Relations just paid an annual dividend of $1.27 on its common stock and increases its dividend by 3.4 percent annually. What is the rate of return on this stock if the current stock price is $38.56 a share?

6.81%

Dee's Dress Emporium has 50,000 shares of common stock outstanding at a price of $27 a share. It also has 1000 shares of preferred stock outstanding at a price of $20 a share. There are 800bonds outstanding that have a semiannual coupon payment of $25. The bonds mature in four years, have a face value of $1,000, and sell at 97 percent of par. What is the capital structure weight of the common stock?

62.91%

Fire Hydrant Pet Supply just paid its first annual dividend of $0.75 a share. The firm plans to increase the dividend by 2.9 percent per year indefinitely. What is the firm's cost of equity if the current stock price is $16.90 per share?

7.47%

All else constant, the weighted average cost of capital for a risky, levered firm will decrease if:

the firms bonds start selling at a premium rather than at a discount