Exam 9: The Cost of Capital

JPR Company's preferred stock is currently selling for $28.00,and pays a perpetual annual dividend of $2.00 per share.Underwriters of a new issue of preferred stock would charge $3 per share in flotation costs.The firm's tax rate is 40%.Compute the cost of new preferred stock for JPR.

Once the weighted average cost of capital (WACC)is determined,then all projects of average risk will be compared to the original WACC regardless of the size of the capital budget.

Sentry Manufacturing paid a dividend yesterday of $5 per share (D0 = $5).The dividend is expected to grow at a constant rate of 8% per year.The price of Sentry Manufacturing's stock today is $29 per share.If Sentry Manufacturing decides to issue new common stock,flotation costs will equal $2.50 per share.Sentry Manufacturing's marginal tax rate is 35%.Based on the above information,the cost of new common stock is

The average cost associated with each additional dollar of financing for investment projects is

An increase in a corporation's marginal tax rate will cause the corporation's after-tax cost of debt to increase,other things remaining the same.

A company has preferred stock with a current market price of $18 per share.The preferred stock pays an annual dividend of 4% based on a par value of $100.Flotation costs associated with the sale of preferred stock equal $1.50 per share.The company's marginal tax rate is 40%.Therefore,the cost of preferred stock is

Phillips Enterprises Inc.is expected to pay a dividend of $2.60 next year.Dividends are expected to grow at a constant rate of 8% per year,and the stock price is currently $20.00.New stock can be sold at this price subject to flotation costs of 15%.The company's marginal tax rate is 35%.Compute the cost of internal equity (retained earnings)and the cost of external equity (new common stock),respectively.

The required return of a preferred stockholder,rps,is higher than the cost of preferred stock for the corporation because stockholders must pay federal taxes on their dividend income.

The mixture of financing sources used by a firm will vary from year to year,so many firms use target capital structure proportions when calculating the firm's weighted average cost of capital.

Adventure Outfitter Corp.can sell common stock for $27 per share and its investors require a 17% return.However,the administrative or flotation costs associated with selling the stock amount to $2.70 per share.What is the cost of capital for Adventure Outfitter if the corporation raises money by selling common stock?

A company's capital structure mix is based on the proportion of fixed versus variable costs in its optimal production process.

If preferred stock pays a $5 annual dividend and sells for $50,the cost of preferred stock financing is 10% since dividends are not tax deductible and preferred stock is sold without flotation costs.

Blammo,Inc.has a target capital structure of 30% debt and 70% equity.The firm is planning to invest in a project that will necessitate raising new capital.New debt will be issued at a before-tax yield of 14%,with a coupon rate of 10%.The equity will be provided by internally generated funds so no new outside equity will be issued.If the required rate of return on the firm's stock is 22% and its marginal tax rate is 35%,compute the firm's cost of capital.

Sentry Manufacturing paid a dividend yesterday of $5 per share (D0 = $5).The dividend is expected to grow at a constant rate of 8% per year.The price of Sentry Manufacturing's stock today is $29 per share.If Sentry Manufacturing decides to issue new common stock,flotation costs will equal $2.50 per share.Sentry Manufacturing's marginal tax rate is 35%.Based on the above information,the cost of retained earnings is

The after-tax cost of debt is equal to one minus the marginal tax rate times the yield to maturity on the firm's outstanding debt.

TC,Inc.has $15 million of outstanding bonds with a coupon rate of 10 percent.The yield to maturity on these bonds is 12.5 percent.If the firm's tax rate is 30 percent,what is relevant cost of debt financing to TC,Inc.?

A firm's capital structure and its target capital structure proportions are important determinants of a firm's weighted average cost of capital.Explain.

In capital budgeting analysis,when computing the weighted average cost of capital,the CAPM approach is typically used to find which of the following?

A corporation may lower its cost of capital by shifting a portion of its total financing from a higher cost source of capital,such as common equity,to a lower cost source of capital,such as debt.

Tempo Corp.will issue preferred stock to finance a new artillery line.The firm's existing preferred stock pays a dividend of $4.00 per share and is selling for $40 per share.Investment bankers have advised Tempo that flotation costs on the new preferred issue would be 5% of the selling price.Tempo's marginal tax rate is 30%.What is the relevant cost of new preferred stock?