Exam 11: Calculating the Cost of Capital

An average of which of the following will give a fairly accurate estimate of what a project's beta will be?

FDR Industries has 50 million shares of stock outstanding selling at $30 per share and an issue of $200 million in 9.5 percent, annual coupon bonds with a maturity of 10 years, selling at 97 percent of par ($1,000). If FDR's weighted average tax rate is 21 percent and its cost of equity is 16 percent, what is FDR's WACC?

Which of the following statements is correct?

JAK Industries has 5 million shares of stock outstanding selling at $25 per share and an issue of $40 million in 8 percent, annual coupon bonds with a maturity of 15 years, selling at 108 percent of par ($1,000). If JAK's weighted average tax rate is 21 percent and its cost of equity is 15 percent, what is JAK's WACC?

Suppose that T-shirts, Inc.'s capital structure features 25 percent equity, 75 percent debt, and that its before-tax cost of debt is 8 percent, while its cost of equity is 12 percent. If the appropriate weighted average tax rate is 21 percent, what will be T-shirts' WACC?

PNB Industries has 20 million shares of common stock outstanding with a market price of $18.00 per share. The company also has outstanding preferred stock with a market value of $50 million, and 500,000 bonds outstanding, each with face value $1,000 and selling at 104 percent of par value. The cost of common stock is 15 percent, the cost of preferred stock is 12 percent, and the cost of debt is 8.50 percent. All costs are given at the before-tax level. If PNB's tax rate is 21 percent, what is the WACC?

Oberon Inc. has a $20 million ($1,000 face value) 10-year bond issue selling for 99 percent of par that pays an annual coupon of 7.25 percent. What would be Oberon's before-tax component cost of debt?

ADK Industries common shares sell for $40 per share. ADK expects to set their next annual dividend at $1.75 per share. If ADK expects future dividends to grow at 7 percent per year, indefinitely, the current risk-free rate is 4 percent, the expected rate on the market is 11 percent, and the stock has a beta of 1.2, what should be the best estimate of the firm's cost of equity, by taking an average of the 2 estimates?

The ________ approach to computing a divisional weighted average cost of capital (WACC) requires only that WACCs for "risky" and "relatively safe" divisions be adjusted.

Sea Shell Industries has 50 million shares of common stock outstanding, 10 million shares of preferred stock outstanding, and 100 thousand bonds. If the common shares are selling for $19 per share, the preferred shares are selling for $8.50 per share, and the bonds are selling for 97 percent of par ($1,000), what would be the weights used in the calculation of Sea Shell's WACC for common stock, preferred stock, and bonds, respectively?

Which of the following statements is correct?

TJ Industries has 7 million shares of common stock outstanding with a market price of $20.00 per share. The company also has outstanding preferred stock with a market value of $10 million, and 100,000 bonds outstanding, each with face value $1,000 and selling at 95 percent of par value. The cost of common stock is 12 percent, the cost of preferred stock is 10 percent, and the cost of debt is 6.45 percent. All costs are given at the before-tax level. If TJ's tax rate is 21 percent, what is the WACC?

An objective approach to calculating divisional WACCs would be done by

Which of the following will directly impact the cost of debt?

Which of the following is a situation in which you would want to use the CAPM approach for estimating the component cost of equity?

Suppose that Beach Blanket's common shares sell for $55 per share, are expected to set their next annual dividend at $3.00 per share, and that all future dividends are expected to grow by 8 percent per year, indefinitely. If Beach faces a flotation cost of 10 percent on new equity issues, what will be the flotation-adjusted cost of equity?

Bill's Boards has 20 million shares of common stock outstanding, 4 million shares of preferred stock outstanding, and 20 thousand bonds. If the common shares are selling for $30 per share, the preferred shares are selling for $17 per share, and the bonds are selling for 96 percent of par, what would be the weight used for debt in the computation of Bill's WACC?

Which of the following is a true statement?

Diddy Corp. stock has a beta of 1.0, the current risk-free rate is 5 percent, and the expected return on the market is 15.5 percent. What is Diddy's cost of equity?

An all-equity firm is considering the projects shown as follows. The T-bill rate is 3 percent and the market risk premium is 6 percent. If the firm uses its current WACC of 12 percent to evaluate these projects, which project(s), if any, will be incorrectly rejected? Project Expected Return Beta 9.0\% 0.8 20.0\% 1.2 13.0\% 1.4 17.0\% 1.5