Exam 9: The Cost of Capital

In general,the least expensive source of capital is

Preferred dividends are paid with before-tax dollars because the dividend rate is known,whereas common stock dividends are paid with after-tax dollars.

A firm's cost of capital is influenced by

The market risk premium remains constant over time because the risk free rate of return moves inversely with beta.

Which of the following should NOT be considered when calculating a firm's WACC?

Jiffy Co.expects to pay a dividend of $3.00 per share in one year.The current price of Jiffy common stock is $60 per share.Flotation costs are $3.00 per share when Jiffy issues new stock.What is the cost of internal common equity (retained earnings)if the long-term growth in dividends is projected to be 8 percent indefinitely?

Phillips Enterprises Inc.is expected to pay a dividend of $2.60 next year.Dividends are expected to grow at a constant rate of 8% per year,and the stock price is currently $20.00.New stock can be sold at this price subject to flotation costs of 15%.The company's marginal tax rate is 35%.Compute the cost of internal equity (retained earnings)and the cost of external equity (new common stock),respectively.

New Jet Airlines plans to issue 14-year bonds with a par value of $1,000 that will pay $60 every six months.The bonds have a market price of $1,220.Flotation costs on new debt will be 4% of the selling price.If the firm has a 35% marginal tax bracket,compute the following: a.Yield to maturity of debt b.After-tax cost of existing debt c.After-tax cost of new debt

Sentry Manufacturing paid a dividend yesterday of $5 per share (D₀ = $4).The dividend is expected to grow at a constant rate of 8% per year.The price of Sentry Manufacturing's stock today is $29 per share.If Sentry Manufacturing decides to issue new common stock,flotation costs will equal $2.50 per share.Sentry Manufacturing's marginal tax rate is 35%.Based on the above information,the cost of new common stock is

JPR Company's preferred stock is currently selling for $28.00,and pays a perpetual annual dividend of $2.00 per share.Underwriters of a new issue of preferred stock would charge $3 per share in flotation costs.The firm's tax rate is 40%.Compute the cost of new preferred stock for JPR.

Using the weighted cost of capital as a cutoff rate assumes that the riskiness of the project being evaluated is similar to the riskiness of the company's existing assets.

A company has preferred stock that can be sold for $21 per share.The preferred stock pays an annual dividend of 3.5% based on a par value of $100.Flotation costs associated with the sale of preferred stock equal $1.25 per share.The company's marginal tax rate is 35%.Therefore,the cost of preferred stock is

The firm's cost of capital may also be referred to as the firm's opportunity cost of capital.

The firm's best financial structure is determined by finding the capital structure that minimizes the firm's cost of capital.

The after-tax cost of equity equals one minus the marginal tax rate times the required rate of return on common stock.

Cost of capital is commonly used interchangeably with all of the following terms EXCEPT

If the before-tax cost of debt is 7% and the firm has a 40% marginal tax rate,the after-tax cost of debt is 2.8%.

Crandal Dockworks is undergoing a major expansion.The expansion will be financed by issuing new 15-year,$1,000 par,9% annual coupon bonds.The market price of the bonds is $1,070 each.Five Rivers flotation expense on the new bonds will be $50 per bond.Crandal's marginal tax rate is 35%.What is the yield to maturity on the newly-issued bonds?

Which of the following differentiates the cost of retained earnings from the cost of newly-issued common stock?

XRT,Inc.is issuing a $1,000 par value bond that pays 8.5% interest annually.Investors are expected to pay $1,100 for the 12-year bond.The firm will pay $50 per bond in flotation costs.What is the after-tax cost of new debt if the firm is in the 35% tax bracket?