Exam 12: The Cost of Capital

Temple Company's common stock dividends have grown over the past 5-year period from $0.60 per share to $0.89 (today). Assume that Temple's dividends are expected to grow at this rate for the foreseeable future. Temple's stock is currently selling for $12 per share. New common stock can be sold to net the company $11 per share. Determine the costs of internal and external equity to Temple.

Whipple Industries, Inc. is in the process of determining its optimal capital budget for next year. The following investment projects are under consideration: The firm's marginal cost of capital schedule is as follows: Determine Whipple's optimal capital budget (in dollars) for the coming year.

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

What is the cost of equity for Fat Rat Laboratories, Inc.? The stock has the following dividends, the stock sells for $70 with flotation costs of $6 and it expects to pay a dividend of $3.20 next year (rounded).

The Allegheny Valley Power Company common stock has a beta of 0.80. If the current risk-free rate is 6.5% and the expected return on the stock market as a whole is 16%, determine the cost of equity capital for the firm (using the CAPM).

The cost of depreciation-generated funds is equal to

If a firm will use only equity funds during the current capital budgeting period then the ____ is the correct capital cost to use for computing the cost of funds for the firm.

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

If a firm is losing money then the after-tax cost of debt is

There are two primary ways that capital is raised. Which of the following statements is/are correct? I. Capital is raised internally by using retained earnings. II. Capital is raised externally by selling fixed assets.

Calculate the after-tax cost of preferred stock for Ohio Valley Power Company, which is planning to sell $100 million of $3.25 cumulative preferred stock to the public at a price of $25 per share. Flotation costs are $1.00 per share. Ohio Valley has a marginal income tax rate of 40%.

A firm is determining its cost of common stock equity. It last paid a divided of $.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?

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

Groves, Inc. pays an annual dividend of $1.22. This dividend is expected to continue growing at a rate of about 5 percent each year. The firm is in a fairly risky business and has a beta of 1.45. The expected market rate of return is 13.5 percent, and the risk-free rate is 9.3 percent. What is the cost of equity for Groves?

The following financial information is available on Rawls Manufacturing Company: Rawls can issue new common stock to net the company $44 per share. Determine the cost of internal equity capital using the capital asset pricing model approach. (Compute answer to the nearest 0.1%).

Break points can be determined by dividing the amount of funds available from each financing source at a fixed cost by the ____ proportion for that financing source.

The most appropriate weights to use in calculating a firm's cost of capital are the proportions of the components in the firm's ____ capital structure.

What is the cost of retained earnings for Foggy Futures Weather Forecasters? The firm is in the 40% tax bracket. The optimal capital structure is listed below:

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

Which of the following statements regarding the cost of capital is/are correct? I. The weighted cost of capital is the discount rate used when computing the net present value. II) The after-tax cost of capital is weighted by the proportions of the capital components in the firm's long-range target capital structure.