Exam 9: The Cost of Capital

Alarm Systems Corporation's preferred stock pays a dividend of $3.60 and sells for $28.00.Alarm Systems Corporation has a marginal tax rate of 35%.What is the cost of preferred financing?

Baxter Inc.has a target capital structure of 30% debt,15% preferred stock,and 55% common equity.The company's after-tax cost of debt is 7%,its cost of preferred stock is 11%,its cost of retained earnings is 15%,and its cost of new common stock is 16%.The company stock has a beta of 1.5 and the company's marginal tax rate is 35%.What is the company's weighted average cost of capital if retained earnings are used to fund the common equity portion?

A company has preferred stock with a current market price of $18 per share.The preferred stock pays an annual dividend of 4% based on a par value of $100.Flotation costs associated with the sale of preferred stock equal $1.50 per share.The company's marginal tax rate is 40%.Therefore,the cost of preferred stock is

Which of the following statements is MOST correct?

Beauty Inc.plans to maintain its optimal capital structure of 40 percent debt,10 percent preferred stock,and 50 percent common equity indefinitely.The required return on each component source of capital is as follows: debt--8 percent; preferred stock--12 percent; common equity--16 percent.Assuming a 40 percent marginal tax rate,what after-tax rate of return must the firm earn on its investments if the value of the firm is to remain unchanged?

Kokapeli,Inc.has a target capital structure of 40% debt and 60% common equity,and has a 40% marginal tax rate.If the firm's yield to maturity on bonds is 7.5% and investors require a 15% return on the firm's common stock,what is the firm's weighted average cost of capital?

The average cost associated with each additional dollar of financing for investment projects is

GPS Inc.wishes to estimate its cost of retained earnings.The firm's beta is 1.3.The rate on 6-month T-bills is 2%,and the return on the S&P 500 index is 15%.What is the appropriate cost for retained earnings in determining the firm's cost of capital?

A company is going to issue a $1,000 par value bond that pays a 7% annual coupon.The company expects investors to pay $942 for the 20-year bond.The expected flotation cost per bond is $42,and the firm is in the 34% tax bracket.Compute the following: a.The yield to maturity on the firm's bonds b.The firm's after-tax cost of existing debt c.The firm's after-tax cost of new debt

Adventure Outfitter Corp.can sell common stock for $27 per share and its investors require a 17% return.However,the administrative or flotation costs associated with selling the stock amount to $2.70 per share.What is the cost of capital for Adventure Outfitter if the corporation raises money by selling common stock?

The cost of new preferred stock is equal to

An increase in a corporation's marginal tax rate will cause the corporation's after tax cost of debt to increase,other things remaining the same.

An increase in a corporation's marginal tax rate will decrease the corporation's cost of debt,but have no impact on its cost of preferred stock or cost of common equity.

For a typical corporation,which of the following capital structures will result in the lowest weighted average cost of capital?

A firm's cost of capital is the required rate of return on the firm's average project.

In order to create value a corporation must earn a rate of return on its invested capital that is higher than the market's required rate of return on that invested capital.

A security with a reasonably stable price will have a lower required rate of return than a security with an unstable price.

A short-term T-bill's rate of return should be used in the CAPM formula to determine the cost of equity capital regardless of the length of the project under consideration.

The average cost of capital is the appropriate rate to use when evaluating new investments,even though the new investments may be in a higher risk class.

The firm's cost of capital is important when evaluation the firm's overall value,but should not be used to evaluate individual projects which have their own unique characteristics.