Exam 11: Calculating the Cost of Capital

Suppose that TNT,Inc.has a capital structure of 43 percent equity,23 percent preferred stock,and 34 percent debt.If the before-tax component costs of equity,preferred stock and debt are 15.4 percent,10 percent and 7 percent,respectively,what is TNT's WACC if the firm faces an average tax rate of 28 percent?

Suppose that TW,Inc.has a capital structure of 25 percent equity,15 percent preferred stock,and 60 percent debt.If the before-tax component costs of equity,preferred stock and debt are 13.5 percent,9.5 percent and 4 percent,respectively,what is TW's WACC if the firm faces an average tax rate of 30 percent?

Flotation costs are:

For computing a project WACC,why do we take some component costs from the firm,but compute others that are specific for the project being considered?

Which of following is a situation in which you would want to use the CAPM approach for estimating the component cost of equity?

Why do we use market-based weights instead of book-value weights when computing the WACC?

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 0.5,1.2,1.5 and 1.8,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 5 percent,market premium of 10 percent)is 15 percent and the after-tax yield on the company's bonds is 7 percent,what will the WACCs be for each division?

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.

OMG Inc.has 4 million shares of common stock outstanding,3 million shares of preferred stock outstanding,and 50 thousand bonds.If the common shares are selling for $21 per share,the preferred shares are selling for $10 per share,and the bonds are selling for 111 percent of par ($1,000),what weight should you use for debt in the computation of OMG's WACC?

Cup Cake Ltd.has 20 million shares of stock outstanding selling at $25 per share and an issue of $30 million in 8 percent,annual coupon bonds with a maturity of 16 years,selling at 98 percent of par ($1,000).If Cup 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 4 percent per year,indefinitely,what is its WACC?