Exam 12: The Cost of Capital, Capital Structure, and Dividend Policy

What does the optimal capital budget maximize? How it is determined?

The total return to stockholders, ke, is composed of the

Determine the (after-tax) percentage cost of a $50 million debt issue that the Mattingly Corporation is planning to place privately with a large insurance company.Assume that the company has a 40% marginal tax rate.This long- term debt issue will yield 12% to the insurance company.

Crickentree has a target capital structure of 30 percent debt and 70 percent equity.If the firm expects to have a net income of $1.7 million and a dividend payout ratio of 40 percent, what will be its equity break point?

Alpha Products maintains a capital structure of 40 percent debt and 60 percent common equity.To finance its capital budget for next year, the firm will sell $50 million of 11 percent debentures at par and finance the balance of its $125 million capital budget with retained earnings.Next year Alpha expects net income to grow 7 percent to $140 million, and dividends also are expected to increase 7 percent to $1.40 per share and to continue growing at that rate for the foreseeable future.The current market value of Alpha's stock is $30.If the firm has a marginal tax rate of 40 percent, what is its weighted cost of capital for the coming year?

The cost of depreciation-generated funds is equal to

If a firm adopts a large proportion of above-average-risk investment projects that are not offset by below-average-risk investment projects

What is the weighted average cost of capital for Mud Bug Corporation?

The historic beta of a firm is of little use as a forecast of the firm's future systematic risk characteristics when

Determine the weighted cost of capital for the Mills Company that will finance its optimal capital budget with $120 million of long-term debt (kd = 12.5%) and $180 million in retained earnings (ke = 16.0%).Mills' present capital structure is considered optimal.The company's marginal tax rate is 40%.(Compute answer to nearest 0.1%.)

During the 1980s, the cost of capital for U.S.firms averaged about 3.3 percentage points higher than Japanese firms.During 1990 this disadvantage may have disappeared due to:

The constant growth valuation model approach to calculating the cost of equity assumes that

Mahlo is planning to diversify into the bakery industry.As a result, its beta should drop from 1.4 to 1.2 and the expected long-term growth rate of dividends will drop from 12% to 9%.The risk-free rate is 4%, the expected market risk premium is 9%, and the current dividend per share paid by Mahlo is $2.10.Should Mahlo complete the diversification into the bakery industry?

The major components that determine the risk premium on a specific security at any point in time include all of the following except

A firm can raise up to $700 million for investment from a mixture of debt, preferred stock and retained equity.Above $700 million, the firm must issue new common stock.Assuming that debt costs and preferred stock costs remain unchanged, the marginal cost of capital for amounts up to $700 million will be the marginal cost of capital for amounts over $700 million.

What are the reasons that the cost of external equity is greater than the cost of internal equity?

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

For a company that is not planning to change its target capital structure, the proportions of debt and equity used in calculating the weighted cost of capital should be based on the current weights of the individual components.

In considering the SML concept, the required returns for any individual security are dependent on certain values.List and discuss those values.

There are four major components that determine the risk premium.They include all the following except