Exam 14: The Cost of Capital

The before-tax cost of this debt issue is:

Walker & Son is issuing a 10-year,$1,000 par value bond that pays 9% interest annually.The bond is expected to sell for $885.What is Walker & Son's after-tax cost of debt if the firm is in the 34% tax bracket?

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

Pony Corporation is undertaking a capital budgeting analysis.The firm's beta is 1.5.The rate on 10-year U.S.Treasury bonds is 5%,and the return on the S & P 500 index is 12%.What is the cost of Pony's common equity?

Caribe's common stock sells for $41,and dividends paid last year were $1.18.The dividends and earnings per share are predicted to have a 5% growth rate.What is the cost of common equity for Caribe?

Jen and Barry's Ice Cream needs $20 million in new capital to expand its production facilities.It will use 40% debt and 60% equity.The company's after-tax cost of debt is 5% and the cost of equity is 12.5%.Flotation costs will be 3% for debt and 9% for equity.Compute Jen and Barry's weighted average flotation cost.

As the corporate tax rate increases,the cost of debt to a corporation increases.

The stock of Autumn Leaves Inc.'s closest competitors is priced to yield between 11% and 13%.Autumn Leaves stock pays a $1.00 dividend which is expected to grow at about 4% for the foreseeable future.We would expect Autumn Leaves stock to sell for approximately:

Sprite Communications will erect 20 new transmission towers at a total cost of $15,000,000.The expansion will increase after-tax operating cash flows by $2.3 million dollars per year for the next 20 years.Sprite's WACC is 12%.To raise the $15,000,000,Sprite will need to issue new securities at a weighted average flotation cost of 12%.What is the NPV of the expansion?

When calculating the weighted average cost of capital,which of the following has to be adjusted for taxes?

A company has a capital structure that consists of 50% debt and 50% equity.Which of the following is generally true?

J & B,Inc.has $5 million of debt outstanding with a coupon rate of 12%.Currently,the yield to maturity on these bonds is 14%.If the firm's tax rate is 40%,what is the after-tax cost of debt to J & B?

Alpha has an outstanding bond issue that has a 7.75% semiannual coupon,a current maturity of 20 years,and sells for $967.97.The firm's income tax rate is 40%.What should Alpha use as an after-tax cost of debt for cost of capital purposes?

The cost of capital is:

The weighted average cost of capital is computed using before-tax costs of each of the sources of financing that a firm uses to finance a project.

Tantasqua Paper Products is composed of 3 divisions: industrial paper products,commercial paper products,and a forestry division which grows trees for wood pulp used in the paper-making process.Each of these divisions takes on a large number of projects with differing risk characteristics.Tantasqua now uses a single discount rate based on the company's WACC to evaluate all capital budgeting proposals.Discuss the advantages and disadvantages of switching to an approach based on separate discount rates for each division or even the risk level of each project.

Estimating a divisional cost of capital by comparing the division to a similar free-standing company is known as:

Alpha's beta is 1.06,the present T-bond rate is 6%,and the return on the S & P 500 is 15.25%.What is Alpha's cost of common equity using the CAPM approach?

The expected dividend is $2.50 for a share of stock priced at $25.What is the cost of common equity if the long-term growth in dividends is projected to be 8%?

When new capital must be raised for an expansion project,flotation costs should: