Exam 14: Cost of Capital

Sister Pools sells outdoor swimming pools and currently has an aftertax cost of capital of 11.6 percent.Al's Construction builds and sells water features and fountains and has an aftertax cost of capital of 10.3 percent.Sister Pools is considering building and selling its own water features and fountains.The sales manager of Sister Pools estimates that the water features and fountains would produce 20 percent of the firm's future total sales.The initial cash outlay for this project would be $85,000.The expected net cash inflows are $17,000 a year for 7 years.What is the net present value of the Sister Pools project?

Wayco Industrial Supply has a pre-tax cost of debt of 7.6 percent,a cost of equity of 14.3 percent,and a cost of preferred stock of 8.5 percent.The firm has 220,000 shares of common stock outstanding at a market price of $27 a share.There are 25,000 shares of preferred stock outstanding at a market price of $41 a share.The bond issue has a face value of $550,000 and a market quote of 101.2.The company's tax rate is 37 percent.What is the firm's weighted average cost of capital?

Suppose your boss comes to you and asks you to re-evaluate a capital budgeting project.The first evaluation was in error,he explains,because it ignored flotation costs.To correct for this,he asks you to evaluate the project using a higher cost of capital which incorporates these costs.Is your boss' approach correct? Why or why not?

When a firm has flotation costs equal to 7 percent of the funding need,project analysts should:

Boulder Furniture has bonds outstanding that mature in 15 years,have a 6 percent coupon,and pay interest annually.These bonds have a face value of $1,000 and a current market price of $1,075.What is the company's aftertax cost of debt if its tax rate is 32 percent?

Panelli's is analyzing a project with an initial cost of $110,000 and cash inflows of $65,000 in year one and $74,000 in year two.This project is an extension of the firm's current operations and thus is equally as risky as the current firm.The firm uses only debt and common stock to finance its operations and maintains a debt-equity ratio of 0.45.The aftertax cost of debt is 4.8 percent,the cost of equity is 12.7 percent,and the tax rate is 35 percent.What is the projected net present value of this project?

What role does the weighted average cost of capital play when determining a project's cost of capital?

Textile Mills borrows money at a rate of 13.5 percent.This interest rate is referred to as the:

The weighted average cost of capital for a wholesaler:

A firm's cost of capital:

The Market Outlet has a beta of 1.38 and a cost of equity of 14.945 percent.The risk-free rate of return is 4.25 percent.What discount rate should the firm assign to a new project that has a beta of 1.25?

Justice,Inc.has a capital structure which is based on 30 percent debt,5 percent preferred stock,and 65 percent common stock.The flotation costs are 11 percent for common stock,10 percent for preferred stock,and 7 percent for debt.The corporate tax rate is 37 percent.What is the weighted average flotation cost?

R.S.Green has 250,000 shares of common stock outstanding at a market price of $28 a share.Next year's annual dividend is expected to be $1.55 a share.The dividend growth rate is 2 percent.The firm also has 7,500 bonds outstanding with a face value of $1,000 per bond.The bonds carry a 7 percent coupon,pay interest semiannually,and mature in 7.5 years.The bonds are selling at 98 percent of face value.The company's tax rate is 34 percent.What is the firm's weighted average cost of capital?

Decline,Inc.is trying to determine its cost of debt.The firm has a debt issue outstanding with 15 years to maturity that is quoted at 107 percent of face value.The issue makes semiannual payments and has an embedded cost of 9 percent annually.What is the aftertax cost of debt if the tax rate is 39 percent?

Henessey Markets has a growth rate of 4.8 percent and is equally as risky as the market.The stock is currently selling for $17 a share.The overall stock market has a 10.6 percent rate of return and a risk premium of 8.7 percent.What is the expected rate of return on this stock?

Which one of the following is the primary determinant of a firm's cost of capital?

Granite Works maintains a debt-equity ratio of 0.65 and has a tax rate of 32 percent.The firm does not issue preferred stock.The pre-tax cost of debt is 9.8 percent.There are 25,000 shares of stock outstanding with a beta of 1.2 and a market price of $19 a share.The current market risk premium is 8.5 percent and the current risk-free rate is 3.6 percent.This year,the firm paid an annual dividend of $1.10 a share and expects to increase that amount by 2 percent each year.Using an average expected cost of equity,what is the weighted average cost of capital?

Sweet Treats common stock is currently priced at $18.53 a share.The company just paid $1.25 per share as its annual dividend.The dividends have been increasing by 2.5 percent annually and are expected to continue doing the same.What is this firm's cost of equity?

Nelson's Landscaping has 1,200 bonds outstanding that are selling for $990 each.The company also has 2,500 shares of preferred stock at a market price of $28 a share.The common stock is priced at $37 a share and there are 28,000 shares outstanding.What is the weight of the common stock as it relates to the firm's weighted average cost of capital?

The aftertax cost of debt: