Exam 14: The Cost of Capital

In most instances,as the amount of debt rises,the common stockholders will decrease their required rate of return.

The after-tax cost of this debt issue is:

Vipsu Corporation plans to issue 10-year bonds with a par value of $1,000 that will pay $55 every six months.The net amount of capital to the firm from the sale of each bond is $840.68.If Vipsu is in the 25% tax bracket,what is the after-tax cost of debt?

Reliable Metals plans to issue bonds that will mature in 20 years,will have a semi-annual coupon rate of 7%. ,and a Moody's rating of Aa2.Bonds of other metals companies with similar maturities and ratings currently yield an average of 6.3%.

Dublin International Corporation's marginal tax rate is 40%.It can issue three-year bonds with a coupon rate of 8.5% and par value of $1,000.The bonds can be sold now at a price of $938.90 each.Determine the appropriate after-tax cost of debt for Dublin International to use in a capital budgeting analysis.

Plimoth Plantation's overall WACC is 11%.It has an opportunity to accept a project that involves nearly riskless cash flows,but will earn only 7%.This project will require a significant portion of the firm's capital.If Plimoth accepts this project,

Sonderson Corporation is undertaking a capital budgeting analysis.The firm's beta is 1.5.The rate on six-month T-bills is 5%,and the return on the S&P 500 index is 12%.What is the appropriate cost of common equity in determining the firm's cost of capital?

An increase in ________ will increase the cost of common equity.

Which of the following must be adjusted for the firm's tax rate when estimating the weighted average cost of capital WACC?

Verigreen Lawn Care products just paid a dividend of $1.85.This dividend is expected to grow at a constant rate of 3% per year,so the next expected dividend is $1.90.The stock price is currently $12.50.New stock can be sold at this price subject to flotation costs of 15%.The company's marginal tax rate is 40%.Compute the cost of common equity.

The George Company,Inc. ,has two issues of debt.Issue A has a maturity value of 8 million dollars,a coupon rate of 8%,paid annually,and is selling at par.Issue B was issued as a 15 year bond 5 years ago.Its coupon rate is 9%,paid annually.Investors demand a pre-tax return of 9.3% on this bond.The maturity value of Issue B is 6 million dollars.The George company has a marginal tax rate of 35%.What is the company's after tax cost of debt?

Moore Financing Corporation has preferred stock in its capital structure paying a dividend of $3.75 and selling for $25.00.If the marginal tax rate for Moore is 34%,what is the after-tax cost of preferred financing?

Flotation costs increase the amount of funds that must be raised to finance an investment.

Which of the following would NOT be considered in calculating a firm's cost of capital?

The cost of newly issued common stock is greater than the current cost common equity because of:

The cost of capital for a firm which uses 45% debt at an after-tax cost of 10% and 55% common stock at a 15% cost is:

Bender and Co.is issuing a $1,000 par value bond that pays 9% interest annually.Investors are expected to pay $918 for the 10-year bond.What is the after-tax cost of debt if the firm is in the 34% tax bracket?

Assume the following facts about a firm's financing in the next year,and calculate the component cost of debt.

When investors increase their required rate of return,the cost of capital increases simultaneously.

Based on current market values,Shawhan Supply 's capital structure is 30% debt,20% preferred stock,and 50% common stock.When using book values,capital structure is 25% debt,10% preferred stock,and 65% common stock.The required return on each component is: debt10%;preferred stock11%;and common stock18%.The marginal tax rate is 40%.What rate of return must Shawhan Supply earn on its investments if the value of the firm is to remain unchanged?