Exam 12: The Cost of Capital

Surfin' Bubba Surfboard Shop is currently selling for $34.25 a share with a current dividend of $1.00. It is estimated that Surfin' Bubba will have a growth rate in earnings of 10% into the foreseeable future. If Surfin' Bubba plans to raise new capital for expansion, what is the cost of new equity if flotation costs are 8% of the price.

Columbia Gas Company's(CG) current capital structure is 35% debt and 65% equity. This year CG has earnings after tax of $5.31 million and is paying $1.6 million in dividends. To finance a transmission pipe line, CG can borrow $2 million at a cost of 10%, the same rate that CG is currently paying on a total of $15 million long-term debt. CG has 1,000,000 shares outstanding and its current market price is $31. If CG's long-term growth rate of dividends is expected to be 8%, what is the weighted cost of capital for the firm? Assume a marginal tax rate of 40%.

The cost of internal equity is cheaper than the cost of external equity. Which of the following statements is/are correct? I. External equity may incur expenses which are deducted from the capital received for the sale of the security. II. Corporations generally discount the price of the securities that are sold to the public in order to raise capital.

The optimal capital budget occurs at the point where two curves intersect. Which of the following is/are one of those curves? I. Weighted marginal cost of capital curve II. Investment opportunity curve

A firm has a beta of 1.2. The return in the market is 14% and the risk-free rate is 6%. The estimated cost of common stock equity is:

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

Pluega Inc. issued a $100 million 8.27% coupon debenture bond due in the next 20 years. The bonds each sold for $996. If the bonds pay interest semi-annually, what is Pluega's after cash cost of debt? Assume 40% tax rate.

Mid-States Utility Company just issued at $3.20 cumulative preferred stock at a price to the public of $30 a share. The flotation costs were $1.50 a share and the issue will be retired in 20 years at its $30 par value. What is the cost of this preferred issue?

If a firm sells assets, generating cash flows, the cost of these funds is ____.

The optimal capital budget is determined by comparing the expected project returns to the company's

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

Studies analyzing the historical returns earned by common stock investors have found that the returns from average risk common stock investments over the years have averaged (arithmetically) ____ percentage points ____ than the returns on Treasury bills.

Far Out Tech (FOT) has a debt ratio of 0.3 and it considers this to be its optimal capital structure. FOT has no preferred stock. FOT has analyzed four capital projects for the coming year as follows: FOT expects to earn $2.7 million after tax next year and pay out $700,000 in dividends. Dividends are expected to be $1.05 a share during the coming year and are expected to grow at a constant rate of 10 percent a year for the foreseeable future. The current market price of FOT stock is $22 and up to $2 million in new equity can be raised for a flotation cost of 10 percent. If more than $2 million is sold then the flotation cost will be 15 percent. Up to $2 million in debt can be sold at par with a coupon rate of 10 percent. Any debt over $2 million will carry a 12 percent coupon rate and be sold at par. If FOT has a marginal tax rate of 40 percent, in which projects should it invest?

Northeast Airlines (NA) has a current dividend of $1.80. Dividends are expected to grow at a rate of 7 percent a year into the foreseeable future. What is NA's cost of external equity if its stock can be sold to net $46 a share?

All of the following are true EXCEPT:

The Institutional Brokers' Estimate Service (IBES) summarizes analysts' ____.

Mid-South Utilities will sell $10 million of $100 par value preferred stock that will pay an annual dividend of $9.75. Mid-South will receive $93.98 per share after flotation costs. If the issue must be retired in 20 years, what is the cost of the preferred issue?

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?

The cost of debt must account for all of the following inputs EXCEPT:

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