Exam 9: The Cost of Capital

When the net proceeds from sale of a bond equal its par value, the before-tax cost would just equal the coupon interest rate.

The cost of equity for Tangshan Mining would be 18.00 percent if the expected return on U.S. Treasury Bills is 5.00 percent, the market risk premium is 10.00 percent, and the firm's beta is 1.3.

Since preferred stock is a form of ownership, it has no maturity date.

The cost of retained earnings is ________.

A firm has issued 10 percent preferred stock, which sold for $100 per share par value. The cost of issuing and selling the stock was $2 per share. The firm's marginal tax rate is 40 percent. The cost of the preferred stock is ________.

Since retained earnings are viewed as a fully subscribed issue of additional common stock, the cost of retained earnings is ________.

The approximate after-tax cost of debt for a 20-year, 7 percent, $1,000 par value bond selling at $960 (assume a marginal tax rate of 40 percent) is ________.

Which of the following is a reason for a firm to underprice new issues?

Generally the least expensive source of long-term capital is ________.

The capital asset pricing model describes the relationship between the required return, or the cost of common stock equity capital, and the nonsystematic risk of a firm as measured by the beta coefficient.

The four basic sources of long-term funds for a firm are ________.

In calculating the cost of common stock equity, ________.

The cost of preferred stock is typically higher than the cost of long-term debt (bonds) because the cost of long-term debt (interest) is tax deductible.

The ________ is the firm's desired optimal mix of debt and equity financing.

According to the CAPM, the required return of an asset is the sum of risk-free rate of return and beta times the risk premium.

In order to recognize the interrelationship between financing and investments, a firm should use ________ when evaluating an investment.

Tangshan Mining is considering issuing preferred stock. The preferred stock would have a par value of $75 and a 5.50 percent dividend. What is the cost of preferred stock for Tangshan if flotation costs would amount to 5.5 percent of par value?

One of the circumstances in which the Gordon growth valuation model for estimating the value of a share of stock should be used is ________.

The ________ is the rate of return required by the market suppliers of capital in order to attract their funds to the firm.

Table 9.2 A firm has determined its optimal structure which is composed of the following sources and target market value proportions. Debt: The firm can sell a 15-year, $1,000 par value, 8 percent bond for $1,050. A flotation cost of 2 percent of the face value would be required in addition to the premium of $50. Common Stock: A firm's common stock is currently selling for $75 per share. The dividend expected to be paid at the end of the coming year is $5. Its dividend payments have been growing at a constant rate for the last five years. Five years ago, the dividend was $3.10. It is expected that to sell, a new common stock issue must be underpriced $2 per share and the firm must pay $1 per share in flotation costs. Additionally, the firm has a marginal tax rate of 40 percent. -The firm's cost of retained earnings is ________. (See Table 9.2)