Finance Chapter 12

7.31

Judy's Boutique just paid an annual dividend of $1.48 on its common stock and increases its dividend by 2.2 percent annually. What is the rate of return on this stock if the current stock price is $29.60 a share?

Pure play approach

use of a weighted average cost of capital that is unique to a particular project, based on companies in similar lines of business

Cost of equity

the return that equity investors require on their investment in the firm

Decrease the firms cost of capital

An increase in a levered firm's tax rate will: A.) Decrease the firms cost of capital B.) Decrease the cost of preferred stock C.) Decrease the cost of equity capital

68.97

Bermuda Cruises issues only common stock and coupon bonds. The firm has a debt-equity ratio of .45. The cost of equity is 17.6 percent and the pretax cost of debt is 8.9 percent. What is the capital structure weight of the firm's equity if the firm's tax rate is 35 percent?

11.03

Donut Delites has a beta of 1.06, a dividend growth rate of 3.2 percent, a stock price of $12 a share, and an expected annual dividend of $.84 per share next year. The market rate of return is 11.4 percent and the risk-free rate is 3.8 percent. What is the firm's cost of equity?

Risk level

Ted is trying to decide what cost of capital he should assign to a project. What should be his primary consideration in this decision?

16.8

Tennessee Valley Antiques would like to issue new equity shares if its cost of equity declines to 12.5 percent. The company pays a constant annual dividend of $2.10 per share. What does the market price of the stock need to be for the firm to issue the new shares?

13.82

The common stock of Contemporary Interiors has a beta of 1.13 and a standard deviation of 21.4 percent. The market rate of return is 12.7 percent and the risk-free rate is 4.1 percent. What is the cost of equity for this firm?

12.56

The common stock of Mill Stones has a beta that is 8 percent greater than the overall market beta. Currently, the market risk premium is 7.65 percent while the U.S. Treasury bill is yielding 4.3 percent. What is the cost of equity for this firm?

6.43

Three years ago, the Morgan Co. issued 15-year, 6.5 percent semiannual coupon bonds at par. Today, the bonds are quoted at 100.6. What is this firm's pretax cost of debt?

Weighted average cost of capital

Which one of the following represents the minimum rate of return a firm must earn on its assets if it is to maintain the current value of its securities? A.) Cost of equity B.) Pretax cost of debt C.) cost of preferred stock D.) Weighted average cost of capital