Exam 14: The Cost of Capital

What is the cost of equity for Fat Rat Laboratories, Inc.? Assume that the stock has the following dividends, the stock sells for $70 with flotation costs of $6, and Fat Rat expects to pay a dividend of $3.20 next year (rounded). YEARS DIVIDENDS 2014 \ 2.94 2013 \ 2.70 2012 \ 2.49 2011 \ 2.29

For firms subject to the 40% marginal tax rate, the after-tax cost of ____ is roughly three-fifths the cost of preferred stock.

According to Value Line, Bestway has a beta of 1.15. If 3-month Treasury bills currently yield 7.9% and the market risk premium is estimated to be 8.3%, what is Bestway's cost of equity capital?

All of the following methods may be used to determine the cost of equity capital (k_e) for a non-dividend-paying stock EXCEPT ____.

What is the weighted average cost of capital for Mud Bug Corporation? ? Source of Capital Capital Components Cost Long-Term Debt \ 60,000 5.6\% Preferred Stock \ 15,000 10.6\% Common Stock \ 75,000 13.0\%

Wellington Gas has a target capital structure of 50% common equity, 40% debt, and 10% preferred stock. The cost of retained earnings is 16%, and the cost of new equity (external) is 16.7%. Wellington can sell debentures that will have an after-tax cost of 8.3% and the after-tax cost of preferred stock will be 11.9%. What is the marginal cost of capital before and after the break point?

Historic average capital costs are ____ making new (marginal) resource allocation decisions.

The optimal capital budget is indicated by the point at which the ____ and the ____ intersect.

What is the investment opportunity curve, and how is it accomplished?

Which of the following is NOT a typical source of debt funds for a small firm?

A firm is determining its cost of common stock equity. It last paid a dividend of $0.52, the dividends are growing at 5%, flotation costs are $2 per share, and the firm will net $72 per share upon the sale of the stock. What is the firm's cost of common equity?

Calculate Bodacious Bodywear's weighted average cost of capital under the following conditions: *The firm has 30% debt, 10% preferred stock, and 60% equity. *The cost of common equity is 14% and the cost of preferred stock is 9%. *The firm's debt has a before-tax cost of debt of 10% (including flotation costs). *The firm is in the 40% tax bracket.

The following financial information is available on Rawls Manufacturing Company: Current per share market price \4 8.00 Current (t=0) per share dividend \3 .50 Expected long-term growth rate 5.0\% ? Rawls can issue new common stock to net the company $44 per share. Determine the cost of internal equity capital using the dividend capitalization model approach. (Compute answer to the nearest 0.1%.)

Firms can raise capital in two ways. Why does internal funding not have a zero cost?

American Dental Laser is selling a 10-year $1,000 face value bond with an 8% coupon rate. Interest is paid annually. The price to the public is $820, and the issue costs per bond are $10 each. Compute the pretax cost of debt for these bonds.

Small firms are reluctant to obtain capital through the sale of common stock because of ____.

In determining the cost of debt, several factors must be considered. All of the following are those factors EXCEPT ____.

What is the cost of preferred stock if the stock is selling for $208, the dividend is $35, and flotation costs are 5% of the selling price?

What is the cost of a preferred stock with a $100 par value that pays a $9.60 dividend per year? The security has a flotation cost of $3.37 and will be retired at its par value in 20 years.

Witin's stock price is currently $34.25, and the current quarterly dividend is $0.25. Consensus estimates for Witin indicate a growth rate in earnings of 10% into the foreseeable future. If Witin plans to sell 1 million shares to raise new capital for expansion, what is the cost of new equity if the issuance costs are 8%?