Exam 11: Calculating the Cost of Capital

KatyDid Clothes has a $150 million ($1000 face value) 15-year bond issue selling for 106% of par that carries a coupon rate of 8%, paid semi-annually. What would be KatyDid's before-tax component cost of debt?

A firm uses only debt and equity in its capital structure. The firm's weight of equity is 70%. The firm's cost of equity is 13% and it has a tax rate of 30%. If the firm's WACC is 11%, what is the firm's before-tax cost of debt?

A proxy beta is _________________.

PAW Industries has 5 million shares of common stock outstanding with a market price of $8.00 per share. The company also has outstanding preferred stock with a market value of $10 million, and 100,000 bonds outstanding, each with face value $1,000 and selling at 96% of par value. The cost of equity is 19%, the cost of preferred is 15%, and the cost of debt is 9%. If PAW's tax rate is 34%, what is the WACC?

XYZ Industries has 10 million shares of stock outstanding selling at $10 per share and an issue of $30 million in 8.5 percent, annual coupon bonds with a maturity of 25 years, selling at 102 percent of par ($1000). If XYZ's weighted average tax rate is 40 percent and its cost of equity is 15 percent, what is XYZ's WACC?

Diddy Corp stock has a beta of 1.0, the current risk-free rate is 5%, and the expected return on the market is 15.5%. What is Diddy's cost of equity?

Why do we use market-value weights instead of book-value weights?

An all-equity firm is considering the projects shown below. The T-bill rate is 4 percent and the market risk premium is 9 percent. If the firm uses its current WACC of 14 percent to evaluate these projects, which project(s) will be incorrectly rejected?

Johnny Cake Ltd. has 10 million shares of stock outstanding selling at $20 per share and an issue of $50 million in 8%, annual coupon bonds with a maturity of 13 years, selling at 93.5% of par ($1000). If Johnny Cake's weighted average tax rate is 34%, its next dividend is expected to be $2.00 per share, and all future dividends are expected to grow at 5% per year, indefinitely, what is its WACC?

Rose has preferred stock selling for 99 percent of par that pays a 9 percent annual coupon. What would be Rose's component cost of preferred stock?

Fern has preferred stock selling for 95 percent of par that pays an 8 percent annual coupon. What would be Fern's component cost of preferred stock?

Which of the following will directly impact the cost of equity?

Which of the following makes this a true statement? Ideally, when searching for a beta for a new line of business

Which of the following is a reason why the divisional cost of capital approach may cause problems if new projects are assigned to the wrong division?

These are fees paid by firms to investment bankers for issuing new securities.

Which of these statements is true regarding calculating weights for WACC?

Which of the following statements is correct?

Apple's 9% annual coupon bond has 10 years until maturity and the bonds are selling in the market for $1190. If the firm's after-tax cost of debt is 5%, what was the firm's tax rate?

Which of the following is a true statement regarding the appropriate tax rate to be used in the WACC?

Which of the following makes this a true statement? If the new project does significantly increase the firm's overall risk,