Exam 11: Calculating the Cost of Capital

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 is most correct?

Which of the following will impact the cost of equity component in the weighted average cost of capital?

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 30 percent. If the firm's WACC is 12 percent, what is the firm's cost of equity?

An all-equity firm is considering the projects shown as follows. The T-bill rate is 4 percent and the market risk premium is 8 percent. If the firm uses its current WACC of 13 percent to evaluate these projects, which project(s) will be incorrectly accepted?

A firm has 1,000,000 shares of common stock outstanding, each with a market price of $10.00 per share. It has 15,000 bonds outstanding, each selling for $900 (with a face value of $1,000). The bonds mature in 15 years, have a coupon rate of 10 percent, and pay coupons semiannually. The firm's equity has a beta of 1.5, and the expected market return is 20 percent. The tax rate is 35 percent and the WACC is 16 percent. What is the risk-free rate?

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 35 percent and the WACC is 16 percent. Calculate the risk-free rate.

The reason that we do not use an after-tax cost of preferred stock is

Which of these is an estimated WACC computed using some sort of proxy for the average equity risk of the projects in a particular division?

Which of the following is a true statement?

Paper Exchange has 80 million shares of common stock outstanding, 60 million shares of preferred stock outstanding, and 50 thousand bonds. If the common shares are selling for $20 per share, the preferred shares are selling for $10 per share, and the bonds are selling for 105 percent of par, what would be the weight used for preferred stock in the computation of Paper's WACC?

Which of the following is a principle of capital budgeting which states that the calculations of cash flows should remain independent of financing?

Which of the following is a true statement regarding the appropriate tax rate to be used in the WACC?

Suppose that Glamour Nails, Inc.'s capital structure features 30 percent equity, 70 percent debt, and that its before-tax cost of debt is 4 percent, while its cost of equity is 10 percent. If the appropriate weighted average tax rate is 34 percent, what will be Glamour Nails' WACC?

KatyDid Clothes has a $150 million ($1,000 face value) 15-year bond issue selling for 106 percent of par that carries a coupon rate of 8 percent, paid semiannually. What would be KatyDid's before-tax component cost of debt?

JaiLai Cos. stock has a beta of 1.7, the current risk-free rate is 6.2 percent, and the expected return on the market is 11 percent. What is JaiLai's cost of equity?

Rose has preferred stock selling for 99 percent of par that pays a 9 percent annual coupon. What would be Rose's component cost of preferred stock?

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

What is the theoretical minimum for the weighted average cost of capital?

TJ Co. stock has a beta of 1.45, the current risk-free rate is 5.75, and the expected return on the market is 14 percent. What is TJ Co's cost of equity?