Exam 12: Determining the Cost of Capital

Your estimate of the market risk premium is 6%.The risk-free rate of return is 5% and General Motors has a beta of 1.2.What is General Motors' cost of equity capital?

A firm has outstanding debt paying annual coupons,with a coupon rate of 5%,and 10 years to maturity.The firm's bonds are currently trading at a price of $950 per $1000 face value.What is the firm's cost of debt if it has a tax rate of 15%?

Ford Motor Company is discussing new ways to recapitalize the firm and raise additional capital.Its current capital structure has a 30% weight in equity,10% in preferred stock,and 60% in debt.The cost of equity capital is 17%,the cost of preferred stock is 11%,and the pretax cost of debt is 8%.What is the weighted average cost of capital for Ford if its marginal tax rate is 30%?

Ford Motor Company is discussing new ways to recapitalize the firm and raise additional capital.Its current capital structure has a 10% weight in equity,20% in preferred stock,and 70% in debt.The cost of equity capital is 15%,the cost of preferred stock is 10%,and the pretax cost of debt is 8%.What is the weighted average cost of capital for Ford if its marginal tax rate is 30%?

SAP Inc.received a $2 million grant under its Small Business Innovation program.SAP invested the grant money and developed a system to remove metal contaminants from storm water in shipyards.The firm estimates that each shipyard spends $600,000 a year on storm water clean-up efforts.If SAP is able to sign up and retain four shipyards from the first year onwards,what is the present value (PV)of the project (net of investment)if the cost of capital for SAP is 15% per year? Assume a cost of operations and other costs for SAP equal 40% of revenue.

When we use the WACC to assess a project,we assume that the ________ ratio does not change.

An all-equity firm produced a dividend flow of $30,000 last year.The market value of the firm is $875,000 and the dividend is expected to increase at 3% each year.What is the cost of equity capital for this firm?

Outstanding debt of Home Depot trades with a yield to maturity of 7%.The tax rate of Home Depot is 30%.What is the effective cost of debt of Home Depot?

Why do we use market values rather than book values in calculation of WACC?

Power Financial Corp has a current share price of $34,and a market capitalization of $24 billion.The company is expected to pay a dividend of $0.37 per share,with a dividend growth rate of 4% per year.The firm has $18 billion of debt with a yield to maturity of 6%.If the firm's tax rate is 30%,what is Power Financial's WACC?

WestJet Airlines is considering purchasing 20 new planes that will save the company $25 million per year in fuel and maintenance costs for the next 10 years.If the cost of the new planes is $200 million dollars and WestJet's WACC is 8.5%,what is the NPV of the project?

Internal financing is more costly than external financing because of issuance costs.

A firm has outstanding debt paying annual coupons,with a coupon rate of 10%,and 8 years to maturity.The firm's bonds are currently trading at a price of $875.50 per $1000 face value.What is the firm's cost of debt if it has a tax rate of 25%?

The after-tax cost of debt ________ the before-tax cost of debt for a firm that has a positive marginal tax rate.

Which of the three costs-debt,preferred stock,and common equity-is most difficult to estimate?

Different divisions with differing lines of business use different costs of capital because their cost of ________ could be different.

The fact that the interest paid on debt is a tax-deductible expense increases the cost of debt financing.

A firm has $56 million of common stock and $32 million of debt.The cost of equity is 11.4%,and the pretax cost of debt is 5.7%.If the firm's tax rate is 20%,what is the firm's WACC?

Should a firm with high retained earnings have a lower cost of equity?

A firm has $2 million market value and it sells preferred stock with a par value of $100.If the coupon rate on the preferred stock is 8% and the preferred stock trades at $90,what is the cost of preferred stock financing?