Exam 11: Calculating the Cost of Capital

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 is 10 percent,and the cost of debt is 6.25 percent.If JLP's tax rate is 34 percent,what is the WACC?

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 statements is correct?

TAFKAP Industries has 8 million shares of stock outstanding selling at $17 per share and an issue of $20 million in 7.5 percent,annual coupon bonds with a maturity of 15 years,selling at 109 percent of par ($1,000).If TAFKAP's weighted average tax rate is 34% and its cost of equity is 12.5 percent,what is TAFKAP's WACC?

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 statements is correct?

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 calculating WACC,should project-specific or firmwide debt and preferred stock components be used,and why?

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?

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 semi-annually.What would be KatyDid's before-tax component cost of debt?

An all-equity firm is considering the projects shown as follows.The T-bill rate is 3 percent and the market risk premium is 6 percent.If the firm uses its current WACC of 12 percent to evaluate these projects,which project(s)will be incorrectly rejected?

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 semi-annually.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?

Which of the following is a reason why the divisional cost of capital approach may cause problems if new projects are assigned to the wrong division?

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?

What might happen when managers use a single,firmwide WACC for all projects?

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

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

FarCry Industries,a maker of telecommunications equipment,has 26 million shares of common stock outstanding,1 million shares of preferred stock outstanding,and 10 thousand bonds.If the common shares sell for $15 per share,the preferred shares sell for $114.50 per share,and the bonds sell for 101 percent of par ($1,000),what weight should you use for preferred stock in the computation of FarCry's WACC?

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?

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?