Exam 10: Determining the Cost of Capital

The cost of debt, rd, is always less than rs, so rd(1 - T) will certainly be less than rs. Therefore, as long as the firm is not completely debt financed, the weighted average cost of capital will always be greater than rd(1 - T).

Hilliard Corp. wants to calculate its weighted average cost of capital (WACC)• The company's long-term bonds currently offer a yield to maturity of 8 percent. • The company's stock price is $32 per share (P0 = $32)• The company recently paid a dividend of $2 per share (D0 = $2.00)• The dividend is expected to grow at a constant rate of 6 percent a year (g = 6%)• The company pays a 10 percent flotation cost whenever it issues new common stock (F = 10%)• The company's target capital structure is 75 percent equity and 25 percent debt. • The company's tax rate is 40 percent. • The company anticipates issuing new common stock during the upcoming year. What is the company's WACC?

An analyst has collected the following information regarding Christopher Co.: • The company's capital structure is 70 percent equity, 30 percent debt. • The yield to maturity on the company's bonds is 9 percent. • The company's year-end dividend is forecasted to be $0.80 a share. • The company expects that its dividend will grow at a constant rate of 9 percent a year. • The company's stock price is $25. • The company's tax rate is 40 percent. • The company anticipates that it will need to raise new common stock this year. Its investment bankers anticipate that the total flotation cost will equal 10 percent of the amount issued. Assume the company accounts for flotation costs by adjusting the cost of capital. Given this information, calculate the company's WACC.

The cost of issuing preferred stock by a corporation must be adjusted to an after-tax figure because of the 70 percent dividend exclusion provision for corporations holding other corporations' preferred stock.

The common stock of Anthony Steel has a beta of 1.20. The risk-free rate is 5 percent and the market risk premium (rM - rRF) is 6 percent. What is the company's cost of common stock, rs?

Bouchard Company's stock sells for $20 per share, its last dividend (D0) was $1.00, and its growth rate is a constant 6 percent. What is its cost of common stock, rs?

The before-tax cost of debt, which is lower than the after-tax cost, is used as the component cost of debt for purposes of developing the firm's WACC.

J. Ross and Sons Inc. has a target capital structure that calls for 40 percent debt, 10 percent preferred stock, and 50 percent common equity. The firm's current after tax cost of debt is 6 percent, and it can sell as much debt as it wishes at this rate. The firm's preferred stock currently sells for $90 per share and pays a dividend of $10 per share; however, the firm will net only $80 per share from the sale of new preferred stock. Ross's common stock currently sells for $40 per share. The firm recently paid a dividend of $2 per share on its common stock, and investors expect the dividend to grow indefinitely at a constant rate of 10 percent per year. -What is the firm's cost of common stock, rs?

The cost of capital should reflect the average cost of the various sources of long-term funds a firm uses to support its assets.

The higher the firm's flotation cost for new common equity, the more likely the firm is to use preferred stock which has no flotation cost and retained earnings whose cost is the average return on assets.

Martin Corporation's common stock is currently selling for $50 per share. The current dividend is $2.00 per share. If dividends are expected to grow at 6 percent per year, then what is the firm's cost of common stock?

A company has a capital structure which consists of 50 percent debt and 50 percent equity. Which of the following statements is most correct?

Which of the following statements is most correct?

Which of the following statements is most correct?

Wyden Brothers uses the CAPM to calculate the cost of equity capital. The company's capital structure consists of common stock, preferred stock, and debt. Which of the following events will reduce the company's WACC?

Which of the following statements is most correct?

In applying the CAPM to estimate the cost of equity capital, which of the following elements is not subject to dispute or controversy?

For a typical firm with a given capital structure, which of the following is correct? (Note: All rates are after taxes.)

Which of the following is not considered a capital component for the purpose of calculating the weighted average cost of capital as it applies to capital budgeting?

The cost of debt is equal to one minus the marginal tax rate multiplied by the coupon rate on outstanding debt.