Exam 14: The Cost of Capital

14.2 Determining the Firm's Capital Structure Weights Use the following information to answer the following question(s). The following data concerning Grafton Computer Peripherals' capital structure is available. -The percentage of preferred stock in Grafton's weighted average cost of capital is:

Sutter Corporation's common stock is selling for $16.80 a share.Last year,Sutter paid a dividend of $.80.Investors are expecting Sutter's dividends to grow at a rate of 5% per year.What is the cost of common equity?

The weighted average cost of capital is the minimum required return that must be earned on additional investment if firm value is to remain unchanged.

Stonehedge Dairy will expand its organic yogurt production capacity at a cost of $10,000,000.The expansion will increase after-tax operating cash by $1.4 million dollars per year for the next 20 years.Stonehedge's WACC is 10%.To raise the $10,000,000 Stonehedge will need to issue new securities at a weighted average flotation cost of 10%.What is the NPV of the expansion?

A bond with a Moody's rating of Aaa and and S&P rating of AAA will have a higher required return than a bond with an unstable price a Moody's rating of Aa1 and and S&P rating of AA+.

The WACC should be computed using:

In order to maximize firm value,management should invest in new assets when cash flows from the assets are discounted at the firm's ________ and result in a positive NPV.

Why are market values preferred to book (balance sheet)values when computing a firm's weighted average cost of capital.

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.What rate should be used to discount the cash flows from the expansion project?

Assuming an after-tax cost of preferred stock of 12% and a corporate tax rate of 40%,a firm must earn at least $20 before tax on every $100 invested.