Exam 11: Calculating the Cost of Capital

The ___________ approach to computing a divisional weighted average cost of capital (WACC) uses the average beta of projects in each division to calculate the WACC.

A firm uses only debt and equity in its capital structure. The firm's weight of debt is 40 percent. The firm could issue new bonds at a yield to maturity of 9 percent and the firm has a tax rate of 30 percent. If the firm's WACC is 11 percent, what is the firm's cost of equity?

When we adjust the WACC to reflect flotation costs, this approach

Tykes Toys' zero coupon bond has 10 years until maturity and the bonds are selling in the market for $650. If the firm's after-tax cost of debt is 11 percent, what was the firm's tax rate?

ADK Industries common shares sell for $60 per share. ADK expects to set their next annual dividend at $3.75 per share. If ADK expects future dividends to grow at 9 percent per year, indefinitely, the current risk-free rate is 4 percent, the expected rate on the market is 11 percent, and the stock has a beta of 1.5, what should be the best estimate of the firm's cost of equity?

Which of these statements is true regarding calculating weights for WACC?

PNB Industries has 20 million shares of common stock outstanding with a market price of $18.00 per share. The company also has outstanding preferred stock with a market value of $50 million, and 500,000 bonds outstanding, each with face value $1,000 and selling at 97 percent of par value. The cost of equity is 15 percent, the cost of preferred stock is 12 percent, and the cost of debt is 8.50 percent. If PNB's tax rate is 40 percent, what is the WACC?

Crab Cakes Ltd. has 5 million shares of stock outstanding selling at $15 per share and an issue of $10 million in 10 percent, annual coupon bonds with a maturity of 25 years, selling at 97 percent of par ($1,000). If Crab Cakes' weighted average tax rate is 30 percent, its next dividend is expected to be $1.00 per share, and all future dividends are expected to grow at 5 percent per year, indefinitely, what is its WACC?

A proxy beta is

Any debt and preferred stock components of capital should

Which of the following will increase the cost of equity?

Which of the following will directly impact the cost of equity?

Suppose that Hanna Nails, Inc.'s capital structure features 45 percent equity, 55 percent debt, and that its before-tax cost of debt is 5 percent, while its cost of equity is 9 percent. If the appropriate weighted average tax rate is 40 percent, what will be Hanna Nails' WACC?

JLP Industries has 6.5 million shares of common stock outstanding with a market price of $20.00 per share. The company also has outstanding preferred stock with a market value of $10 million, and 25,000 bonds outstanding, each with face value $1,000 and selling at 90 percent of par value. The cost of equity is 14 percent, the cost of preferred stock is 10 percent, and the cost of debt is 6.25 percent. If JLP's tax rate is 34 percent, what is the WACC?

An objective approach to calculating divisional WACCs would be done by

TellAll has 10 million shares of common stock outstanding, 20 million shares of preferred stock outstanding, and 100 thousand bonds. If the common shares are selling for $32 per share, the preferred shares are selling for $20 per share, and the bonds are selling for 106 percent of par, what would be the weight used for preferred stock in the computation of TellAll's WACC?

Suppose that Model Nails, Inc.'s capital structure features 60 percent equity, 40 percent debt, and that its before-tax cost of debt is 6 percent, while its cost of equity is 10 percent. If the appropriate weighted average tax rate is 28 percent, what will be Model Nails' WACC?

Which of the following statements is correct?

XYZ Industries has 10 million shares of stock outstanding selling at $10 per share and an issue of $30 million in 8.5 percent, annual coupon bonds with a maturity of 25 years, selling at 102 percent of par ($1,000). If XYZ's weighted average tax rate is 40 percent and its cost of equity is 15 percent, what is XYZ's WACC?

Which of the following statements is correct?