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?

Kendall,Inc.has $15 million of outstanding bonds with a coupon rate of 10 percent.The yield to maturity on these bonds is 12.5 percent.If the firm's tax rate is 30 percent,what is relevant cost of debt financing to Kendall,Inc.?

The investor's required rate of return will equal the firm's cost of capital if corporate transactions costs are taken into account.

KayCee Manufacturing Company paid a dividend yesterday of $3.50 per share.The dividend is expected to grow at a constant rate of 10% per year.The price of KayCee's common stock today is $40 per share.If KayCee decides to issue new common stock,flotation costs will equal $4.00 per share.Kaycee's marginal tax rate is 35%.Based on the above information,the cost of retained earnings is

All the following variables are used in computing the cost of debt except:

A firm's weighted average cost of capital is determined using all of the following inputs except:

The cost of internal common equity is already on an after-tax basis since dividends paid to common stockholders are not tax deductible.

Given the following information on S & G Inc.'s capital structure,compute the company's weighted average cost of capital. The company's marginal tax rate is 40%.

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 cost of new preferred stock is equal to

Investors require higher rates of return to compensate for purchasing power losses resulting from inflation.

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.

Porky Pine Co.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.Porky 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?

Higgins Office Corp.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 Higgins Office Corp.earn on its investments if the value of the firm is to remain unchanged?

The cost of debt measures the cost of a bank loan,while the cost of preferred stock is used as a proxy for the cost of a new bond issue.

Kelly Corporation will issue new common stock to finance an expansion.The existing common stock just paid a $1.50 dividend,and dividends are expected to grow at a constant rate 8% indefinitely.The stock sells for $45,and flotation expenses of 5% of the selling price will be incurred on new shares.What is the cost of new common stock be for Kelly Corp.?

The cost of preferred stock is equal to the preferred stock dividend divided by the net proceeds per preferred share.

Meacham Corp.wants to issue bonds with a 9% coupon rate,a face value of $1,000,and 12 years to maturity.Meacham estimates that the bonds will sell for $1,090 and that flotation costs will equal $15 per bond.Meacham Corp.common stock currently sells for $30 per share.Meacham can sell additional shares by incurring flotation costs of $3 per share.Meacham paid a dividend yesterday of $4.00 per share and expects the dividend to grow at a constant rate of 5% per year.Meacham also expects to have $12 million of retained earnings available for use in capital budgeting projects during the coming year.Meacham's capital structure is 40% debt and 60% common equity.Meacham's marginal tax rate is 35%. a.Calculate the after-tax cost of debt assuming Meacham's bonds are its only debt. b.Calculate the cost of retained earnings. c.Calculate the cost of new common stock. d.Calculate the weighted average cost of capital assuming Meacham's total capital budget is $30 million.

J & B Corp.is investing in a major capital budgeting project that will require the expenditure of $16 million.The money will be raised by issuing $2 million of bonds,$4 million of preferred stock,and $10 million of new common stock.The company estimates is after-tax cost of debt to be 7%,its cost of preferred stock to be 9%,the cost of retained earnings to be 14%,and the cost of new common stock to be 17%.What is the weighted average cost of capital for this project?

The cost of debt capital is obtained by substituting the net proceeds per bond for the bond price in the bond valuation equation and solving for the required return.