Exam 11: Calculating the Cost of Capital

An all-equity firm is considering the projects shown below. The T-bill rate is 3% and the market risk premium is 6%. If the firm uses its current WACC of 12% to evaluate these projects, which project(s), if any, will be incorrectly rejected?

JLP Industries has 6.5 million shares of common stock outstanding with a market price of $20.00 per share. The company also has outstanding preferred stock with a market value of $10 million, and 25,000 bonds outstanding, each with face value $1,000 and selling at 90% of par value. The cost of equity is 14%, the cost of preferred is 10%, and the cost of debt is 6.25%. If JLP's tax rate is 34%, what is the WACC?

IVY has preferred stock selling for 98 percent of par that pays a 7 percent annual coupon. What would be IVY's component cost of preferred stock?

FlavR Co stock has a beta of 2.0, the current risk-free rate is 2, and the expected return on the market is 9 percent. What is FlavR Co's cost of equity?

Which of these makes this a true statement? When determining the appropriate weights used in calculating a WACC, it should reflect

Which statement makes this a false statement? When a firm pays commissions to underwriting firms that float the issuance of new stock,

A firm has 5,000,000 shares of common stock outstanding, each with a market price of $8.00 per share. It has 25,000 bonds outstanding, each selling for $1100 with a $1000 face value. The bonds mature in 12 years, have a coupon rate of 9%, and pay coupons semi-annually. The firm's equity has a beta of 1.4, and the expected market return is 15%. The tax rate is 35% and the WACC is 14%. Calculate the risk-free rate.

JaiLai Cos. stock has a beta of 1.7, the current risk-free rate is 6.2%, and the expected return on the market is 11%. What is JaiLai's cost of equity?

TJ Co stock has a beta of 1.45, the current risk-free rate is 5.75, and the expected return on the market is 14 percent. What is TJ Co's cost of equity?

Which of these statements is true regarding divisional WACC?

Which of these completes this statement to make it true? The constant growth model is

A firm has 1,000,000 shares of common stock outstanding, each with a market price of $10.00 per share. It has 15,000 bonds outstanding, each selling for $900 (with a face value of $1,000). The bonds mature in 15 years, have a coupon rate of 10%, and pay coupons semi-annually. The firm's equity has a beta of 1.5, and the expected market return is 20%. The tax rate is 35% and the WACC is 16%. What is the risk-free rate?

Solar Shades has 8 million shares of common stock outstanding, 4 million shares of preferred stock outstanding, and 10 thousand bonds. If the common shares are selling for $13 per share, the preferred shares are selling for $30 per share, and the bonds are selling for 105 percent of par, what would be the weight used for equity in the computation of Solar Shades' WACC?

Suppose your firm has decided to use a divisional WACC approach to analyze projects. The firm currently has 4 divisions, A through D, with average betas for each division of 0.5, 1.0, 1.3 and 1.6, respectively. If all current and future projects will be financed with half debt and half equity, and if the current cost of equity (based on an average firm beta of 1.0 and a current risk-free rate of 7%) is 14% and the after-tax yield on the company's bonds is 8%, what are the WACCs for divisions A through D?

Which of the following statements is correct?

Which of the following statements is correct?

Denote the impact that flotation costs have on capital budgeting decisions.

PNB Industries has 20 million shares of common stock outstanding with a market price of $18.00 per share. The company also has outstanding preferred stock with a market value of $50 million, and 500,000 bonds outstanding, each with face value $1,000 and selling at 97% of par value. The cost of equity is 15%, the cost of preferred is 12%, and the cost of debt is 8.50%. If PNB's tax rate is 40%, what is the WACC?

Which of the following will increase the cost of equity?

An objective approach to calculating divisional WACCs would be done by