Exam 11: Calculating the Cost of Capital

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

Sports Corp. has 10 million shares of common stock outstanding, 5 million shares of preferred stock outstanding, and 1 million bonds. If the common shares are selling for $25 per share, the preferred shares are selling for $12.50 per share, and the bonds are selling for 97 percent of par, what would be the weight used for equity in the computation of Sports' WACC?

Which of these are fees paid by firms to investment bankers for issuing new securities?

ADK has 30,000 15-year, 9 percent semi-annual coupon bonds outstanding. If the bonds currently sell for 90 percent of par and the firm pays an average tax rate of 32 percent, what will be the before-tax and after-tax component cost of debt?

OMG Inc. has 4 million shares of common stock outstanding, 3 million shares of preferred stock outstanding, and 50 thousand bonds. If the common shares are selling for $21 per share, the preferred shares are selling for $10 per share, and the bonds are selling for 111 percent of par ($1,000), what weight should you use for debt in the computation of OMG's WACC?

Cup Cake Ltd. has 20 million shares of stock outstanding selling at $25 per share and an issue of $30 million in 8 percent, annual coupon bonds with a maturity of 16 years, selling at 98 percent of par ($1,000). If Cup Cake's weighted average tax rate is 34 percent, its next dividend is expected to be $2.00 per share, and all future dividends are expected to grow at 4 percent per year, indefinitely, what is its WACC?

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 1.25 and 2.5, 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 4 percent) is 12 percent and the after-tax yield on the company's bonds is 8 percent, what are the WACCs for divisions A and B?

Suppose that T-shirts, Inc.'s capital structure features 25 percent equity, 75 percent debt, and that its before-tax cost of debt is 8 percent, while its cost of equity is 12 percent. If the appropriate weighted average tax rate is 30 percent, what will be T-shirts' WACC?

A firm uses only debt and equity in its capital structure. The firm's weight of equity is 75 percent. The firm's cost of equity is 16 percent and it has a tax rate of 30 percent. If the firm's WACC is 13%, what is the firm's before-tax cost of debt?

Flotation costs are

Marme Inc. has preferred stock selling for 137 percent of par that pays an 11 percent annual dividend. What would be Marme's component cost of preferred stock?

Apple's 9 percent annual coupon bond has 10 years until maturity and the bonds are selling in the market for $1,190. If the firm's after-tax cost of debt is 5 percent, what was the firm's tax rate?

Town Crier has 10 million shares of common stock outstanding, 2 million shares of preferred stock outstanding, and 10 thousand bonds. If the common shares are selling for $28 per share, the preferred shares are selling for $15.50 per share, and the bonds are selling for 97 percent of par, what would be the weight used for debt in the computation of Town Crier's WACC?

Suppose that TipsNToes, Inc.'s capital structure features 40 percent equity, 60 percent debt, and that its before-tax cost of debt is 9 percent, while its cost of equity is 15 percent. If the appropriate weighted average tax rate is 34 percent, what will be TipsNToes' WACC?

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

A firm has 4,000,000 shares of common stock outstanding, each with a market price of $12.00 per share. It has 25,000 bonds outstanding, each selling for $980. The bonds mature in 20 years, have a coupon rate of 9 percent, and pay coupons semiannually. The firm's equity has a beta of 1.5, and the expected market return is 15 percent. The tax rate is 30 percent and the WACC is 15 percent. What is the risk-free rate?

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?

Johnny Cake Ltd. has 10 million shares of stock outstanding selling at $20 per share and an issue of $50 million in 8 percent, annual coupon bonds with a maturity of 13 years, selling at 93.5 percent of par ($1,000). If Johnny Cake's weighted average tax rate is 34 percent, its next dividend is expected to be $2.00 per share, and all future dividends are expected to grow at 5 percent per year, indefinitely, what is its 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 30 percent. If the firm's WACC is 13 percent, what is the firm's cost of equity?

Amino Industries common shares sell for $100 per share. Amino expects to set their next annual dividend at $4.00 per share. If Amino expects future dividends to grow at 5 percent per year, indefinitely, the current risk-free rate is 2 percent, the expected rate on the market is 7 percent, and the stock has a beta of 1.5, what should be the best estimate of the firm's cost of equity?