Exam 14: The Cost of Capital

Which of the following is a good reason to use divisional costs of capital?

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?

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

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.

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.

All capital projects incur flotation costs, no matter how they are financed.

The firm financed completely with equity capital has a cost of capital equal to the required return on common stock.

Moore Financing Corporation has preferred stock in its capital structure paying a dividend of $3.75 and selling for $25.00. If the marginal tax rate for Moore is 34%, what is the after-tax cost of preferred financing?

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.

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?

The opportunity cost of securities issued by a firm is determined by

Spencer Bioengineering's preferred stock has a par value of $100 and pays a dividend of $4.50. The current price of Spencer's preferred is $75. Spencer's tax rate is 34%. The before tax and after tax cost of preferred equity to Spencer is

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

The cost of common equity using the CAPM is

The percentage of debt in the firm's capital structure should be adjusted by muliplying by 1 minus the firm's marginal tax rate.

Assuming an after-tax cost of preferred stock of 10% and a corporate tax rate of 34%, a firm must earn at least $15.15 before tax on every $100 invested.

PVE, Inc. has $15 million of debt outstanding with a coupon rate of 9%. Currently, the yield to maturity on these bonds is 7%. If the firm's tax rate is 35%, what is the after-tax cost of debt to PVE?

A firm has an issue of preferred stock that pays an annual dividend of $2.00 per share and currently is selling for $18.50 per share. Finally, the firm's marginal tax rate is 34%. This firm's cost of financing with new preferred stock is

Which of the following must be adjusted for the firm's tax rate when estimating the weighted average cost of capital WACC?

A project with a positive NPV may have a negative NPV when flotation costs are considered.