Chapter 14
A company has a capital structure that consists of 50% debt and 50% equity. The cost of equity financing is? The weighted average cost of capital is?
- The cost of equity financing is greater than the cost of debt financing - The weighted average cost of capital is less than the cost of equity financing.
A firm's capital structure consists of?
- common stock - preferred stock - bonds
The weighted average cost of capital is computed using before−tax costs of each of the sources of financing that a firm uses to finance a project T /F
F
The firm's weighted average cost of capital includes the cost of common stock, preferred stock and retained earnings, but not debt T / F
F
A firm has an issue of preferred stock that pays an annual dividend of $2.00 per share and currently is selling for $18.50 per share. Finally, the firm's marginal tax rate is 34%. This firm's cost of financing with new preferred stock is
10.81%
Sonderson Corporation is undertaking a capital budgeting analysis. The firm's beta is 1.5. The rate on 10 year T−Bonds is 1.6% and the return on the S&P 500 index is 8%. What is the appropriate cost of common equity in determining the firm's cost of capital?
11.2%
Metals Corp. has $2,575,000 of debt, $550,000 of preferred stock, and $18,125,000 of common equity. Metals Corp.'s after−tax cost of debt is 5.25%, preferred stock has a cost of 6.35%, and newly issued common stock has a cost of 14.05%. What is Metals Corp.'s weighted average cost of capital?
12.78%
The expected dividend is $2.50 for a share of stock priced at $25. What is the cost of common equity if the long−term growth in dividends is projected to be 4%?
14%
Pony Corporation is undertaking a capital budgeting analysis. The firm's beta is 1.5. The rate on 10−year U.S. Treasury bonds is 5%, and the return on the S & P 500 index is 12%. What is the cost of Pony's common equity?
15.5%
Alpha's beta is 1.06, the present T−bond rate is 6%, and the return on the S & P 500 is 15.25%. What is Alpha's cost of common equity using the CAPM approach?
15.81%
Welch's Lawn Care products just paid a dividend of $1.85. This dividend is expected to grow at a constant rate of 3% per year, so the next expected dividend is $1.90. The stock price is currently $12.50. . The company's marginal tax rate is 35%. Compute the cost of common equity.
18.2%
The last paid dividend is $2 for a share of common stock that is currently selling for $20. What is the cost of common equity if the long−term growth rate in dividends for the firm is expected to be 8%?
18.8%
Sola Cola Corporation is undertaking a capital budgeting analysis. The rate on 10−year U.S. Treasury bonds is 3.60%, and the return on the S & P 500 index is 11.6%. If the cost of Sola Cola's common equity is 19.6%, calculate their beta
2.0
Given the following information, determine the risk−free rate. Cost of equity = 12% Beta = 1.50 Market risk premium = 6%
3.0%
Alpha has an outstanding bond issue that has a 7.75% semiannual coupon, a current maturity of 20 years, and sells for $967.97. The firm's income tax rate is 40%. What should Alpha use as an after−tax cost of debt for cost of capital purposes?
4.85%
Bender and Co. is issuing a $1,000 par value bond that pays 9% interest annually. Investors are expected to pay $918 for the 10−year bond. What is the after−tax cost of debt if the firm is in the 34% tax bracket?
6.83%
Which of the following reasons causes investors to require a lower rate of return on the firm's bonds than on its stock?
Bondholders bear less risk than common stockholders bear.
No adjustment is made in the cost of preferred stock for taxes since preferred stock dividends are not tax−deductible. T / F
T
Which of the following best describes a firm's cost of capital?
The rate of return that must be earned on its investments in order to satisfy the firm's investors
Berlioz Inc. is trying to estimate its cost of common equity, and it has the following information. The firm has a beta of 0.90, the before−tax cost of the firm's debt is 7.75%, and the firm estimates that the risk−free rate is 4% while the current market return is 12%. Berlioz stock currently sells for $35.00 per share. The firm pays dividends annually and expects dividends to grow at a constant rate of 5% indefinitely. The most recent dividend per share, paid yesterday, is $2.00. Finally, the firm has a marginal tax rate of 34%. The best estimate of the cost of new common equity is
between 11.0%. and 11.2%
The CAPM approach is used to determine the cost of
common equity
In order to maximize firm value, management should invest in new assets when cash flows from the assets are discounted at the firm's ________ and result in a positive NPV
cost of capital
Which of the following must be adjusted for the firm's tax rate when estimating the weighted average cost of capital WACC?
cost of debt
The weights used to determine the relative importance of the firm's sources of capital should reflect
current market values
When calculating the weighted average cost of capital, which of the following has to be adjusted for taxes?
debt
For tax purposes, interest on corporate debt is
deductible for the borrower, but not for the investor
The cost of newly issued common stock is greater than the current cost common equity because of
flotation costs on newly issued common stock
The most expensive source of capital is usually
new common stock
Go to question #10
weighted average cost of capital problem
2013 - $1.10 2014 - $1.15 2015 - $1.21 2016 - $1.25 2017 - $1.28 What are the arithmetic and geometric average growth rates of DIY's dividend payments?
3.87%, 3.86%
PVE, Inc. has $15 million of debt outstanding with a coupon rate of 9%. Currently, the yield to maturity on these bonds is 7%. If the firm's tax rate is 35%, what is the after−tax cost of debt to PVE?
4.55%
Spencer Bioengineering's preferred stock has a par value of $100 and pays a dividend of $4.50. The current price of Spencer's preferred is $75. Spencer's tax rate is 34%. The before tax and after tax cost of preferred equity to Spencer is
6.00% , 6.00%
