Exam 11: Calculating the Cost of Capital

FlavR Co. stock has a beta of 2.0, the current risk-free rate is 2, and the expected return on the market is 9 percent. What is FlavR Co's cost of equity?

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?

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?

Which of the following statements is correct?

IVY has preferred stock selling for 98 percent of par that pays a 7 percent annual coupon. What would be IVY's component cost of preferred stock?

Suppose that TNT, Inc. has a capital structure of 43 percent equity, 23 percent preferred stock, and 34 percent debt. If the before-tax component costs of equity, preferred stock and debt are 15.4 percent, 10 percent and 7 percent, respectively, what is TNT's WACC if the firm faces an average tax rate of 28 percent?

Which of the following statements is correct?

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?

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?

An estimated WACC computed using some sort of proxy for the average equity risk of the projects in a particular business unit is known as the

Which of these makes this a true statement? The WACC formula

Which of the following statements is correct?

JackITs has 5 million shares of common stock outstanding, 1 million shares of preferred stock outstanding, and 20 thousand bonds. If the common shares are selling for $28 per share, the preferred shares are selling for $13.50 per share, and the bonds are selling for 98 percent of par, what would be the weight used for equity in the computation of JackITs' WACC?

Apple's 9 percent annual coupon bond has 10 years until maturity and the bonds are selling in the market for $790. If the firm's after-tax cost of debt is 8 percent, what was the firm's tax rate?

Tykes Toys' 8 percent annual coupon bond has 8 years until maturity and the bonds are selling in the market for $988. If the firm's after-tax cost of debt is 11.75 percent, what was the firm's tax rate?

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

Which of the following statements is true?

When calculating the weighted average cost of capital, weights are based on

Suppose that PAW, Inc. has a capital structure of 60 percent equity, 10 percent preferred stock, and 30 percent debt. If the before-tax component costs of equity, preferred stock and debt are 17.5 percent, 12 percent and 6.5 percent, respectively, what is PAW's WACC if the firm faces an average tax rate of 28 percent?

Suppose that Tan Lines' common shares sell for $20 per share, are expected to set their next annual dividend at $1.00 per share, and that all future dividends are expected to grow by 5 percent per year, indefinitely. If Tan Lines faces a flotation cost of 10 percent on new equity issues, what will be the flotation-adjusted cost of equity?