Exam 9: The Cost of Capital

A firm's cost of capital is influenced by

Alarm Systems Corporation's preferred stock pays a dividend of $3.60 and sells for $28.00.Alarm Systems Corporation has a marginal tax rate of 35%.What is the cost of preferred financing?

The cost of capital is the rate that must be earned on an investment project if the project is to increase the value of the common shareholders' investment.

A firm's weighted average cost of capital is determined using all of the following inputs EXCEPT

Beauty Inc.plans to maintain its optimal capital structure of 40 percent debt,10 percent preferred stock,and 50 percent common equity indefinitely.The required return on each component source of capital is as follows: debt-8 percent; preferred stock-12 percent; common equity-16 percent.Assuming a 40 percent marginal tax rate,what after-tax rate of return must the firm earn on its investments if the value of the firm is to remain unchanged?

A company's cost of capital is equal to a weighted average of its investors' required returns.

Which of the following statements is MOST correct?

The DEF Company is planning a $64 million expansion.The expansion is to be financed by selling $25.6 million in new debt and $38.4 million in new common stock.The before-tax required rate of return on debt is 9 percent and the required rate of return on equity is 14 percent.If the company is in the 35 percent tax bracket,what is the firm's cost of capital?

The investor's required rate of return will equal the firm's cost of capital if corporate transactions costs are taken into account.

A corporate bond has a face value of $1,000 and a coupon rate of 5%.The bond matures in 15 years and has a current market price of $925.If the corporation sells more bonds,it will incur flotation costs of $25 per bond.If the corporate tax rate is 35%,what is the after-tax cost of debt capital?

The cost of a particular source of capital (debt,preferred stock,common stock)is equal to the investor's required rate of return after adjusting for the effects of both flotation costs and corporate taxes.

The market risk premium remains constant over time because the risk-free rate of return moves inversely with beta.

Corporations have two costs of common equity,one for retained earnings and one if the company issues new common stock.

Calculating the cost of capital for divisions within a company is not recommended because the data is too fragmented and all divisions are part of the same company in any case.