Exam 14: Cost of Capital

Handy Man,Inc.has zero coupon bonds outstanding that mature in 8 years.The bonds have a face value of $1,000 and a current market price of $640.What is the company's pre-tax cost of debt?

The subjective approach to project analysis:

Travis & Sons has a capital structure which is based on 40 percent debt,5 percent preferred stock,and 55 percent common stock.The pre-tax cost of debt is 7.5 percent,the cost of preferred is 9 percent,and the cost of common stock is 13 percent.The company's tax rate is 39 percent.The company is considering a project that is equally as risky as the overall firm.This project has initial costs of $325,000 and annual cash inflows of $87,000,$279,000,and $116,000 over the next three years,respectively.What is the projected net present value of this project?

The cost of preferred stock:

Grill Works and More has 7 percent preferred stock outstanding that is currently selling for $49 a share.The market rate of return is 14 percent and the firm's tax rate is 37 percent.What is the firm's cost of preferred stock?

Dog Gone Good Engines has a bond issue outstanding with 17 years to maturity.These bonds have a $1,000 face value,a 9 percent coupon,and pay interest semi-annually.The bonds are currently quoted at 82 percent of face value.What is the company's pre-tax cost of debt if the tax rate is 38 percent?

What are some advantages of the subjective approach to determining the cost of capital and why do you think that approach is utilized?

A group of individuals got together and purchased all of the outstanding shares of common stock of DL Smith,Inc.What is the return that these individuals require on this investment called?

Which one of the following statements is correct?

Carson Electronics uses 70 percent common stock and 30 percent debt to finance its operations.The aftertax cost of debt is 5.4 percent and the cost of equity is 15.4 percent.Management is considering a project that will produce a cash inflow of $36,000 in the first year.The cash inflows will then grow at 3 percent per year forever.What is the maximum amount the firm can initially invest in this project to avoid a negative net present value for the project?

Silo Mills has a beta of 0.95 and a cost of equity of 11.9 percent.The risk-free rate of return is 2.8 percent.The firm is currently considering a project that has a beta of 1.03 and a project life of 6 years.What discount rate should be assigned to this project?

Southern Home Cookin' just paid its annual dividend of $0.65 a share.The stock has a market price of $13 and a beta of 1.12.The return on the U.S.Treasury bill is 2.5 percent and the market risk premium is 6.8 percent.What is the cost of equity?

The cost of equity for a firm:

Wind Power Systems has 20-year,semi-annual bonds outstanding with a 5 percent coupon.The face amount of each bond is $1,000.These bonds are currently selling for 114 percent of face value.What is the company's pre-tax cost of debt?

The dividend growth model:

Flotation costs for a levered firm should:

Samuelson Plastics has 7.5 percent preferred stock outstanding.Currently,this stock has a market value per share of $52 and a book value per share of $38.What is the cost of preferred stock?

Jungle,Inc.has a target debt-equity ratio of 0.72.Its WACC is 11.5 percent and the tax rate is 34 percent.What is the cost of equity if the aftertax cost of debt is 5.5 percent?

The capital structure weights used in computing the weighted average cost of capital:

Mangrove Fruit Farms has a $250,000 bond issue outstanding that is selling at 92 percent of face value.The firm also has 1,500 shares of preferred stock and 15,000 shares of common stock outstanding.The preferred stock has a market price of $35 a share compared to a price of $24 a share for the common stock.What is the weight of the preferred stock as it relates to the firm's weighted average cost of capital?