Exam 11: Calculating the Cost of Capital

A firm has 5,000,000 shares of common stock outstanding,each with a market price of $8.00 per share.It has 25,000 bonds outstanding,each selling for $1,100 with a $1,000 face value.The bonds mature in 12 years,have a coupon rate of 9 percent,and pay coupons semi-annually.The firm's equity has a beta of 1.4,and the expected market return is 15 percent.The tax rate is 35 percent and the WACC is 14 percent.Calculate the risk-free rate.

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

Which of the following is a principle of capital budgeting which states that the calculations of cash flows should remain independent of financing?

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 is 12 percent,and the cost of debt is 8.50 percent.If PNB's tax rate is 40 percent,what is the WACC?

An estimated WACC computed using some sort of proxy for the average equity risk of the projects in a particular business unit is known as the:

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?

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?

TJ Co.stock has a beta of 1.45,the current risk-free rate is 5.75,and the expected return on the market is 14 percent.What is TJ Co's cost of equity?

List and explain all the components of the WACC equation.

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 share 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?

Apple's 9 percent annual coupon bond has 10 years until maturity and the bonds are selling in the market for $790.If the firm's after-tax cost of debt is 8 percent,what was the firm's tax rate?

When calculating the weighted average cost of capital,weights are based on:

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),if any,will be incorrectly rejected?

JaiLai Cos.stock has a beta of 1.7,the current risk-free rate is 6.2 percent,and the expected return on the market is 11 percent.What is JaiLai's cost of equity?

Which of these statements is true regarding divisional WACC?

What is the theoretical minimum for the weighted average cost of capital?

Define subjective and objective approaches to divisional cost of capital.

Which of the following statements is correct?

Suppose that Tan Lotion's common shares sell for $18 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 7 percent per year,indefinitely.If Tan Lotion faces a flotation cost of 12 percent on new equity issues,what will be the flotation-adjusted cost of equity?

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?