Exam 12: Cost of Capital

City Rentals has 44,000 shares of common stock outstanding at a market price of $32 a share.The common stock just paid a $1.50 annual dividend and has a dividend growth rate of 2.5 percent.There are 7,500 shares of $9 preferred stock outstanding at a market price of $72 a share.The outstanding bonds mature in 11 years, have a total face value of $825,000, a face value per bond of $1,000, and a market price of $989 each, and a pretax yield to maturity of 8.3 percent.The tax rate is 35 percent.What is the firm's weighted average cost of capital?

Piedmont Hotels is an all-equity firm with 48,000 shares of stock outstanding.The stock has a beta of 1.19 and a standard deviation of 14.8 percent.The market risk premium is 7.8 percent and the risk-free rate of return is 4.1 percent.The company is considering a project that it considers riskier than its current operations so has assigned an adjustment of 1.35 percent to the project's discount rate.What should the firm set as the required rate of return for the project?

Cool Fire, Inc.has 7.2 percent bonds outstanding that mature in 15 years.The bonds pay interest semiannually and have a face value of $1,000.Currently, the bonds are selling for $975.

Commercial Construction Builders has a beta of 1.34, a dividend growth rate of 2.1 percent for the foreseeable future, a stock price of $15 per share, and an expected annual dividend of $0.45 per share next year.The market rate of return is 12.8 percent and the risk-free rate is 4.2 percent.What is the firm's average cost of equity?

Which one of the following statements concerning capital structure weights is correct?

The results of the dividend growth model:

Muttly Engineering announced this morning that its next annual dividend will be decreased to $2.45 a share and that all future dividends will be decreased by an additional 1.45 percent annually.What is the current value per share if the required return is 19.5 percent?

The 7 percent preferred stock of Midwest Muffler and Towing is selling for $65 per share.What is the firm's cost of preferred stock if the tax rate is 21 percent and the par value per share is $100?

Musical Charts just paid an annual dividend of $1.84 per share.This dividend is expected to increase by 2.1 percent annually.Currently, the firm has a beta of 1.12 and a stock price of $31 a share.The risk-free rate is 4.3 percent and the market rate of return is 13.2 percent.What is the cost of equity capital for this firm?

Traditional Bank has an issue of preferred stock with an annual dividend of $7.50 that just sold for $62 a share.What is the bank's cost of preferred stock?

A firm that uses its weighted average cost of capital as the required return for all of its investments will:

Farmer's Supply is considering opening a clothing store, which would be a new line of business for the firm.Management has decided to use the cost of capital of a similar clothing store as the discount rate to evaluate this proposed expansion.Which one of the following terms describes this evaluation approach?

The market rate of return is 12.65 percent and the risk-free rate is 3.1 percent.Galaxy Co.has 15 percent more systematic risk than the overall market and has a dividend growth rate of 3.75 percent.The firm's stock is currently selling for $53 a share and has a dividend yield of 4.53 percent.What is the firm's average cost of equity?

Appalachian Mountain Goods has paid increasing dividends of $10, $.12, $.15, and $.20 a share over the past four years, respectively.The firm estimates that future increases in its dividends will be equal to the arithmetic average growth rate over these past four years.The stock is currently selling for $12.50 a share.The risk-free rate is 3.4 percent and the market risk premium is 8.1 percent.What is the cost of equity for this firm if its beta is 1.46?

Stock in ABC Enterprises has a beta of 1.28.The market risk premium is 7.4 percent, and T-bills are currently yielding 3.6 percent.ABC's most recently paid dividend was $1.62 per share, and dividends are expected to grow at an annual rate of 2 percent indefinitely.If the stock sells for $38 a share, what is your best estimate of ABC's cost of equity?

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?

Which one of the following is used as the pretax cost of debt?

What is the primary reason why the cash flow from assets (CFA) is adjusted when used to value a firm?

The cost of preferred stock:

Casper's is analyzing a proposed expansion project that is much riskier than the firm's current operations.Thus, the project will be assigned a discount rate equal to the firm's cost of capital plus 2.5 percent.The proposed project has an initial cost of $18.1 million that will be depreciated on a straight-line basis to a zero book value over 20 years.The project also requires additional inventory of $428,000 over the project's life.Management estimates the facility will generate cash inflows of $2.46 million a year over its 20-year life.After 20 years, the company plans to sell the facility for an aftertax amount of$1.4 million.The company has 58,000 shares of common stock outstanding at a market price of $52 a share.This stock just paid an annual dividend of $2.84 a share.The dividend is expected to increase by 3.6 percent annually.The firm also has 15,000 shares of 9 percent preferred stock with a market value of $87 a share.The preferred stock has a par value of $100.The company has $1.2 million of face value bonds with semiannual payments and a coupon rate of 9 percent.The bonds are currently priced at 102 percent of face value and mature in 13 years.The tax rate is 35 percent.Should the firm pursue the expansion project at this point in time? Why or why not?