Exam 14: The Cost of Capital

Welch's 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. . The company's marginal tax rate is 35%. Compute the cost of common equity.

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

Lott Bros Developers evaluates a great many small to medium size projects each year. Some are riskier than others. Lott Bros should probably

Gibson Industries is issuing a $1,000 par value bond with an 8% semi-annual interest coupon rate and that matures in 11 years. Investors are willing to pay $972 for these bonds. Gibson is in the 34% tax bracket. What will be the after-tax cost of debt of the bond?

MTD Inc. has a new bond issue that will net the firm $1,603,500. The bonds have a $1,500,000 par value, pay interest annually at a 6% coupon rate, and mature in 10 years. The firm has a marginal tax rate of 34%. The after-tax cost of the debt issue is

The last paid dividend is $2 for a share of common stock that is currently selling for $20. What is the cost of common equity if the long-term growth rate in dividends for the firm is expected to be 8%?

The firm's weighted average cost of capital is

As the size of a financing issue increases, the ________ usually decreases on a percentage basis.

A firm's cost of capital is not affected by the amount of leverage it uses.

National Gridlock's capital structure consisted of $125 million of debt and $250 million of equity before it issued bonds to borrow an additional $125 million. The new funds will be used to finance infrastructure improvements and expansion. The company believes that the project will generate enough cash to retire 1/5 of the bonds each year. How do the borrowing and the repayment plan affect the discount rate(s) that should be used to evaluate this project?

The percentage of preferred stock in Spencer's weighted average cost of capital is

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 this approach.

The preferred stock of Wells Co. sells for $15.30 and pays a $1.75 dividend. What is the cost of capital for preferred stock?

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

Flotation costs are higher for debt than for equity because debt creates more risk to the issuer.

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?

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

The cost of common equity using the dividend-growth model is

Most firms use Treasury securities with maturities of ________ to determine the appropriate risk-free rate to use in the CAPM.

The total capital that should be used in computing the weights for Spencer's WACC is