Exam 11: Calculating the Cost of Capital

ADK has 30,000 15-year, 9 percent annual coupon bonds outstanding. If the bonds currently sell for 111 percent of par and the firm pays an average tax rate of 21 percent, what will be the before-tax and after-tax component cost of debt?

FarCry Industries, a maker of telecommunications equipment, has 26 million shares of common stock outstanding, 1 million shares of preferred stock outstanding, and 10 thousand bonds. If the common shares sell for $15 per share, the preferred shares sell for $114.50 per share, and the bonds sell for 101 percent of par ($1,000), what weight should you use for preferred stock in the computation of FarCry's WACC?

When we adjust the WACC to reflect flotation costs, this approach

Which of these completes this statement to make it true? The constant growth model is

Which of the following will increase the cost of equity?

Suppose your firm has decided to use a divisional WACC approach to analyze projects. The firm currently has four divisions, A through D, with average betas for each division of 0.5, 1.0, 1.3 and 1.6, respectively. If all current and future projects will be financed with half debt and half equity, and if the current cost of equity (based on an average firm beta of 1.0 and a current risk-free rate of 7 percent) is 14 percent and the after-tax yield on the company's bonds is 8 percent, what are the WACCs for divisions A through D?

Which statement makes this a false statement? When a firm pays commissions to underwriting firms that float the issuance of new stock

Which of the following is most correct?

A firm uses only debt and equity in its capital structure. The firm's weight of debt is 45 percent. The firm could issue new bonds at a yield to maturity of 10 percent and the firm has a tax rate of 21 percent. If the firm's WACC is 12 percent, what is the firm's cost of equity?

JLP Industries has 6.5 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 25,000 bonds outstanding, each with face value $1,000 and selling at 90 percent of par value. The cost of equity is 14 percent, the cost of preferred stock is 10 percent, and the yield of the debt is 6.25%. If JLP's tax rate is 34 percent, what is the WACC?

A firm has 5,000,000 shares of common stock outstanding, each with a market price of $10.00 per share. It has 55,000 bonds outstanding, each selling for $990 with a $1,000 face value. The bonds mature in 15 years, have a coupon rate of 8 percent, and pay coupons semiannually. The firm's equity has a beta of 2.0, and the expected market return is 15 percent. The tax rate is 21 percent and the WACC is 16 percent. Calculate the risk-free rate.

An all-equity firm is considering the projects shown as follows. Project Expected Return Beta A 7.0\% 0.25 B 17.0\% 1.3 C 12.0\% 1.6 D 10.0\% 2.1 The T-bill rate is 4 percent and the market risk premium is 9 percent. If the firm uses its current WACC of 14 percent to evaluate these projects, which project(s) will be incorrectly rejected?

Suppose your firm has decided to use a divisional WACC approach to analyze projects. The firm currently has 2 divisions, A and B, with betas for each division of 0.5 and 1.5, respectively. If all current and future projects will be financed with half debt and half equity, and if the current cost of equity (based on an average firm beta of 1.0 and a current risk-free rate of 5 percent) is 14 percent and the after-tax yield on the company's bonds is 6 percent, what are the WACCs for divisions A and B?

An all-equity firm is considering the projects shown as follows. The T-bill rate is 4 percent and the market risk premium is 7 percent. If the firm uses its current WACC of 12 percent to evaluate these projects, which project(s), if any, will be incorrectly accepted or rejected? Project Expected Return Beta 9.0\% 0.6 20.0\% 1.2 13.0\% 1.4 17.0\% 1.5

Suppose that Glamour Nails, Inc.'s capital structure features 30 percent equity, 70 percent debt, and that its after-tax cost of debt is 4 percent, while its cost of equity is 10 percent. If the appropriate weighted average tax rate is 21 percent, what will be Glamour Nails' WACC?

A firm uses only debt and equity in its capital structure. The firm's weight of debt is 75 percent. The firm could issue new bonds at a yield to maturity of 12 percent and the firm has a tax rate of 21 percent. If the firm's WACC is 13 percent, what is the firm's cost of equity?

Which of the following statements is true?

Uptown Inc. has preferred stock selling for 102 percent of par that pays a 6 percent annual coupon. What would be Uptown's component cost of preferred stock?

Accessory Industries has 2 million shares of common stock outstanding, 1 million shares of preferred stock outstanding, and 100 thousand bonds. If the common shares are selling for $22 per share, the preferred shares are selling for $10.50 per share, and the bonds are selling for 96 percent of par ($1,000), what would be the weights used in the calculation of Accessory's WACC for common stock, preferred stock, and bonds, respectively?

Which of the following statements is correct?