Exam 14: Cost of Capital

Simple Foods has a zero coupon bond issue outstanding that matures in 9 years.The bonds are selling at 42 percent of par value.What is the company's aftertax cost of debt if the tax rate is 38 percent?

Fama's Llamas has a weighted average cost of capital of 9.5 percent.The company's cost of equity is 15.5 percent,and its pretax cost of debt is 8.5 percent.The tax rate is 34 percent.What is the company's target debt-equity ratio?

The City Street Corporation's common stock has a beta of 1.2.The risk-free rate is 3.5 percent and the expected return on the market is 13 percent.What is the firm's cost of equity?

The Shoe Outlet has paid annual dividends of $0.65,$0.70,$0.72,and $0.75 per share over the last four years,respectively.The stock is currently selling for $26 a share.What is this firm's cost of equity?

Decker's is a chain of furniture retail stores.Furniture Fashions is a furniture maker and a supplier to Decker's.Decker's has a beta of 1.38 as compared to Furniture Fashion's beta of 1.12.The risk-free rate of return is 3.5 percent and the market risk premium is 8 percent.What discount rate should Decker's use if it considers a project that involves the manufacturing of furniture?

The flotation cost for a firm is computed as:

New York Deli has 7 percent preferred stock outstanding that sells for $34 a share.This stock was originally issued at $45 per share.What is the cost of preferred stock?

The common stock of Metal Molds has a negative growth rate of 1.5 percent and a required return of 18 percent.The current stock price is $11.40.What was the amount of the last dividend paid?

Delta Lighting has 30,000 shares of common stock outstanding at a market price of $15.00 a share.This stock was originally issued at $31 per share.The firm also has a bond issue outstanding with a total face value of $280,000 which is selling for 86 percent of par.The cost of equity is 13 percent while the aftertax cost of debt is 6.9 percent.The firm has a beta of 1.48 and a tax rate of 30 percent.What is the weighted average cost of capital?

Highway Express has paid annual dividends of $1.05,$1.20,$1.25,$1.15,and $0.95 over the past five years,respectively.What is the average dividend growth rate?

Bleakly Enterprises has a capital structure of 40 percent common stock,10 percent preferred stock,and 50 percent debt.The flotation costs are 4.5 percent for debt,7 percent for preferred stock,and 9.5 percent for common stock.The corporate tax rate is 34 percent.What is the weighted average flotation cost?

Holdup Bank has an issue of preferred stock with a $5 stated dividend that just sold for $92 per share.What is the bank's cost of preferred?

Tidewater Fishing has a current beta of 1.21.The market risk premium is 8.9 percent and the risk-free rate of return is 3.2 percent.By how much will the cost of equity increase if the company expands its operations such that the company beta rises to 1.50?

The outstanding bonds of Tech Express are priced at $989 and mature in 10 years.These bonds have a 6 percent coupon and pay interest annually.The firm's tax rate is 35 percent.What is the firm's aftertax cost of debt?

The average of a firm's cost of equity and aftertax cost of debt that is weighted based on the firm's capital structure is called the:

The Oil Derrick has an overall cost of equity of 13.6 percent and a beta of 1.28.The firm is financed solely with common stock.The risk-free rate of return is 3.4 percent.What is an appropriate cost of capital for a division within the firm that has an estimated beta of 1.18?

Stock in Country Road Industries has a beta of 0.97.The market risk premium is 10 percent while T-bills are currently yielding 5.5 percent.Country Road's most recent dividend was $1.55 per share,and dividends are expected to grow at a 7 percent annual rate indefinitely.The stock sells for $32 a share.What is the estimated cost of equity using the average of the CAPM approach and the dividend discount approach?

Which one of the following statements is correct?

The weighted average cost of capital for a firm is the:

If a firm uses its WACC as the discount rate for all of the projects it undertakes then the firm will tend to: I.reject some positive net present value projects. II.accept some negative net present value projects. III.favor high risk projects over low risk projects. IV.increase its overall level of risk over time.