Exam 10: Cost of Capital

firm's cost of external equity raised by issuing new stock is the same as the required rate of return on the firm's outstanding common stock.

Granby Foods' (GF) balance sheet shows a total of $25 million long-term debt with a coupon rate of 8.50% The yield to maturity on this debt is 8.00%, and the debt has a total current market value of $27 million The company has 10 million shares of stock, and the stock has a book value per share of $5.00 The current stock price is $20.00 per share, and stockholders' required rate of return, rs, is 12.25% The company recently decided that its target capital structure should have 35% debt, with the balance being common equity The tax rate is 40% Calculate WACCs based on book, market, and target capital structuresWhat is the sum of these three WACCs?

Lincoln Company sold a $1,000 par value, noncallable bond several years ago that now has 20 years to maturity and a 7.00% annual coupon that is paid semiannually The bond currently sells for $925 and the company's tax rate is 40% What is the component cost of debt for use in the WACC calculation?

Bartlett Company's target capital structure is 40% debt, 15% preferred, and 45% common equity The after-tax cost of debt is 6.00%, the cost of preferred is 7.50%, and the cost of common using retained earnings is 12.75% The firm will not be issuing any new stock You were hired as a consultant to help determine their cost of capitalWhat is its WACC?

a consultant to Basso Inc., you have been provided with the following data: D1 = $0.67; P0 = $27.50; and g = 8.00% (constant) What is the cost of common from retained earnings based on the DCF approach?

cost of equity raised by retaining earnings can be less than, equal to, or greater than the cost of external equity raised by selling new issues of common stock, depending on tax rates, flotation costs, the attitude of investors, and other factors.

cost of common equity obtained by retaining earnings is the rate of return the marginal stockholder requires on the firm's common stock.

Perpetual preferred stock from Franklin Incsells for $97.50 per share, and it pays an $8.50 annual dividend If the company were to sell a new preferred issue, it would incur a flotation cost of 4.00% of the price paid by investors What is the company's cost of preferred stock for use in calculating the WACC?

help estimate its cost of common equity, Maxwell and Associates recently hired you You have obtained the following data: D0 = $0.90; P0 = $27.50; and g = 7.00% (constant) Based on the DCF approach, what is the cost of common from retained earnings?

Weatherall Enterprises has not debt or preferred stock-it is an all-equity firm-and has a beta of 2.0 The chief financial officer is evaluating a project with an expected return of 14%, before any risk adjustment The risk-free rate is 5%, and the market risk premium is 4% The project being evaluated is riskier than an average project, in terms of both its beta risk and its total risk Which of the following statements is CORRECT?

Suppose you are the president of a small, publicly-traded corporation Since you believe that your firm's stock price is temporarily depressed, all additional capital funds required during the current year will be raised using debt In this case, the appropriate marginal cost of capital for use in capital budgeting during the current year is the after-tax cost of debt.

estimate the company's WACC, Marshall Increcently hired you as a consultant You have obtained the following information (1) The firm's noncallable bonds mature in 20 years, have an 8.00% annual coupon, a par value of $1,000, and a market price of $1,050.00 (2) The company's tax rate is 40% (3) The risk-free rate is 4.50%, the market risk premium is 5.50%, and the stock's beta is 1.20 (4) The target capital structure consists of 35% debt and the balance is common equity The firm uses the CAPM to estimate the cost of common stock, and it does not expect to issue any new shares What is its WACC?

its current financial policies, Flagstaff Incwill have to issue new common stock to fund its capital budget Since new stock has a higher cost than retained earnings, Flagstaff would like to avoid issuing new stock Which of the following actions would REDUCE its need to issue new common stock?

company's perpetual preferred stock currently sells for $92.50 per share, and it pays an $8.00 annual dividend If the company were to sell a new preferred issue, it would incur a flotation cost of 5.00% of the issue price What is the firm's cost of preferred stock?

cost of preferred stock to a firm must be adjusted to an after-tax figure because 70% of dividends received by a corporation may be excluded from the receiving corporation's taxable income.

Avery Corporation's target capital structure is 35% debt, 10% preferred, and 55% common equity The interest rate on new debt is 6.50%, the yield on the preferred is 6.00%, the cost of common from retained earnings is 11.25%, and the tax rate is 40% The firm will not be issuing any new common stock What is Avery's WACC?

are a finance intern at Chambers and Sons and they have asked you to help estimate the company's cost of common equity You obtained the following data: D1 = $1.25; P0 = $27.50; g = 5.00% (constant); and F = 6.00% What is the cost of equity raised by selling new common stock?