Exam 12: Determining the Cost of Capital

Power Financial Corp has a current share price of $30,and a market capitalization of $20 billion. The firm's beta is 0.93,the risk-free rate is 3.2%,and the market risk premium is 7%.The firm has $12 billion of debt with a yield to maturity of 5%.If the firm's tax rate is 20%,what is Power Financial's WACC?

For an unlevered firm,the cost of capital of the firm can be determined by using the

When calculating the WACC,it is standard practice to subtract ________ to compute the net debt outstanding.

GM has a market value of $8 billion of equity and a market value of $12 billion of debt.What are the weights in equity and debt that are used for calculating the WACC?

Xcom Industries will pay a dividend of $0.44 next year,and expects its dividends to grow at 8% per year.The current price of Xom stock is $6.45 per share.What is Xom's cost of equity?

Lululemon Athletica has a current share price of $50,and a market capitalization of $7 billion.The firm's beta is 0.27,the risk-free rate is 2.4%,and the market risk premium is 6%.The firm has $4 billion of debt with a yield to maturity of 8%.If the firm's tax rate is 35%,what is Lululemon's WACC?

A levered firm is one that has ________ outstanding.

Between the two models Constant Dividend Growth Model (CDGM)and Capital Asset Pricing Model (CAPM),which is a better method for computation of the cost of equity?

Assume JUP has debt with a book value of $20 million,trading at 120% of par value.The firm has book equity of $20 million,and 2 million shares trading at $18 per share.What weights should JUP use in calculating its WACC?

Barley Corp has debt with a book value of $19 million,currently trading at 90% of book value.It also has book value of equity of $15 million,and 10 million shares of common stock trading at $2.45 per share.What weights should Barley Corp use for debt and equity in calculating its WACC?

The costs of external financing must be deducted from the net present value (NPV)of a project to evaluate if it is worth undertaking.

Leverage is the amount of ________ on a firm's balance sheet.

An all-equity firm produced a dividend flow of $40,000 last year.The market value of the firm is $800,000 and the dividend is expected to increase at 5% each year.What is the cost of equity capital for this firm?

A firm's cost of debt is the rate of interest it would have to pay to refinance its existing debt.

Bell Media has common stock trading at a price of $74,and a market capitalization of $23 billion.The firm also has preferred stock worth a total of $6 billion,currently trading at $54 per share and paying a dividend of $4.50 per share.The firm's beta is 1.2,the risk-free rate is 2.4%,and the market risk premium is 6%.The firm has $28 billion of debt with a yield to maturity of 4%.If the firm's tax rate is 30%,what is Bell's WACC?

The outstanding debt of Berstin Corp.has ten years to maturity,a current yield of 7%,and a price of $95.Assume the debt has a face value of $100.What is the pretax cost of debt if the tax rate is 30%.

Financial managers do not need to use all sources of financing in order to determine the cost of capital.

Many financial managers use market risk premiums that are closer to 5%,which is lower than historical averages,because investors require a ________ risk premium for holding risky securities than in the past.

One should use accounting-based book values rather than market values of debt and equity to determine the weights for the different sources of capital.

Starling Capital has outstanding corporate debt paying a 10% coupon,with a current yield to maturity of 8%.If Starling's tax rate is 35%,what is the firm's effective cost of debt?