Exam 11: Calculating the Cost of Capital

An all-equity firm is considering the projects shown as follows.The T-bill rate is 4 percent and the market risk premium is 8 percent.If the firm uses its current WACC of 13 percent to evaluate these projects,which project(s)will be incorrectly accepted?

TJ Industries has 7 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 100,000 bonds outstanding,each with face value $1,000 and selling at 95 percent of par value.The cost of equity is 12 percent,the cost of preferred is 10 percent,and the cost of debt is 6.45 percent.If TJ's tax rate is 34 percent,what is the WACC?

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

ADK has 30,000 15-year 9 percent annual coupon bonds outstanding.If the bonds currently sell for 111 percent of par and the firm pays an average tax rate of 36 percent,what will be the before-tax and after-tax component cost of debt?

WC Inc.has a $10 million (face value),10-year bond issue selling for 99 percent of par that pays an annual coupon of 9 percent.What would be WC's before-tax component cost of debt?

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?

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?

The reason that we do not use an after-tax cost of preferred stock is:

A proxy beta is:

KatyDid Clothes has a $150 million ($1,000 face value)15-year bond issue selling for 86 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?

Which statement makes this a false statement? When a firm pays commissions to underwriting firms that float the issuance of new stock:

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?

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?

Bill's Boards has 20 million shares of common stock outstanding,4 million shares of preferred stock outstanding,and 20 thousand bonds.If the common shares are selling for $30 per share,the preferred shares are selling for $17 per share,and the bonds are selling for 96 percent of par,what would be the weight used for debt in the computation of Bill's WACC?

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?

Which of the following statements is correct?

Suppose your firm has decided to use a divisional WACC approach to analyze projects.The firm currently has four divisions,A through D,with average betas for each division of 0.5,1.0,1.3 and 1.6,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 7 percent)is 14 percent and the after-tax yield on the company's bonds is 8 percent,what are the WACCs for divisions A through D?

PAW Industries has 5 million shares of common stock outstanding with a market price of $8.00 per share.The company also has outstanding preferred stock with a market value of $10 million,and 100,000 bonds outstanding,each with face value $1,000 and selling at 96 percent of par value.The cost of equity is 19 percent,the cost of preferred is 15 percent,and the cost of debt is 9 percent.If PAW's tax rate is 34 percent,what is the WACC?

Fern has preferred stock selling for 95 percent of par that pays an 8 percent annual coupon.What would be Fern's component cost of preferred stock?

OMG Inc.has 4 million shares of common stock outstanding,3 million shares of preferred stock outstanding,and 5 thousand bonds.If the common shares sell for $17 per share,the preferred shares sell for $126 per share,and the bonds sell for 117 percent of par ($1,000),what weight should you use for preferred stock in the computation of OMG's WACC?