Exam 14: The Cost of Capital

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?

A firm's weighted marginal cost of capital increases when internal equity financing is exhausted but is unaffected by an increase in the cost of other financing sources.

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?

Many corporate finance professionals favor the CAPM for determining the cost of equity.Which of the following is a reason for this preference?

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?

Survey literature indicates that separate project costs of capital

Using a firm's overall cost of capital to evaluate individual projects creates an incentive for managers to avoid high risk projects with potentially high returns.

Why is it important to use market-based weights rather than balance sheet weights when estimating a company's weighted average cost of capital

No adjustment is made in the cost of preferred stock for taxes since preferred stock dividends are not tax-deductible.

The proportion of debt in this firm's capital structure is

For tax purposes,interest on corporate debt is

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.

How frequently do most firms update their cost of capital?

The best estimate of the cost of new common equity is

Explain why the investor's required return on debt is not equal to the corporation's cost of debt,and explain why the investor's required return on equity is not equal to the corporation's cost of equity.

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

The "pure play" approach to estimating a divisions WACC involves

Hoak Company's common stock is currently selling for $50.Last year's dividend was $1.83 per share.Investors expect dividends to grow at an annual rate of 9% into the future. a.What is Hoak's cost of common equity? b.Selling new common stock is expected to decrease the price of the stock by $5.00.What is the cost of new common stock? Dividends will remain the same.

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

Which of the following best describes a firm's cost of capital?