Exam 14: The Cost of Capital

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

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

In theory using the same discount rate to evaluate all projects can lead to

Sonderson Corporation is undertaking a capital budgeting analysis. The firm's beta is 1.5. The rate on 10 year T-Bonds is 1.6% and the return on the S&P 500 index is 8%. What is the appropriate cost of common equity in determining the firm's cost of capital?

The investor's required rate of return differs from the firm's cost of capital due to the

All things equal, as the tax rate increases, the incentive to use more debt financing increases.

When flotation costs are involved, a project's initial investment should be computed as

The most expensive source of capital is usually

Which of the following reasons causes investors to require a lower rate of return on the firm's bonds than on its stock?

How frequently do most firms update their cost of capital?

The after-tax cost of common stock is

Capital budgeting analyses typically assume a constant cost of capital, even though the analysts know it will change. One reason for this practice is that

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

For tax purposes, interest on corporate debt is

Briefly identify and describe some important uses of 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. Compute Jen and Barry's weighted average flotation cost.

Using separate cost of capital estimates for individual projects is not appropriate when the projects are relatively few in number and large in scale.

The before-tax cost of this debt issue is

Pilgrim's WACC is 12%. It has one opportunity to invest in a high risk project with an expected rate of return of 25%. It has another opportunity to lease a building to a government agency. The expected rate of return on the lease is 10%.