Exam 14: The Cost of Capital

Paramount,Inc.just paid a dividend of $2.05 per share,and the firm is expected to experience constant growth of 12.50% over the foreseeable future.The common stock is currently selling for $65.90 per share.What is Paramount's cost of retained earnings using the Dividend Growth Model approach?

Which of the following is a valid issue in implementing the dividend growth model? The model

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.

Flotation costs

A firm can estimate its cost of debt by finding the yield on bonds issued by other firms with similar ratings and maturities.

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.

In calculating the cost of capital for an average firm,which of the following statements is true?

The after-tax cost of debt is

The after-tax cost of capital is computed by multiplying the before-tax cost of capital by 1 minus the tax rate.

Alio e Olio has restaurants throughout the United States,Canada,and Western Europe.It is considering a proposal to open several restaurants in major cities of India and China.

The highest cost of capital at which a project can reach break-even NPV is the project's

The cost of preferred stock is equal to

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

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.

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?

Metals Corp.has $2,575,000 of debt,$550,000 of preferred stock,and $18,125,000 of common equity.Metals Corp.'s after-tax cost of debt is 5.25%,preferred stock has a cost of 6.35%,and newly issued common stock has a cost of 14.05%.What is Metals Corp.'s weighted average cost of capital?

Most large firms use individual costs of capital to evaluate all projects.

Given the following information,determine the risk-free rate. Cost of equity = 12% Beta = 1.50 Market risk premium = 6%

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 is the total amount of capital that will need to be raised to finance the expansion project?

The after-tax cost of common stock is