Exam 9: The Cost of Capital

A firm has a beta of 1.2. The market return equals 14 percent and the risk-free rate of return equals 6 percent. The estimated cost of common stock equity is

The approximate before-tax cost of debt for a 10-year, 8 percent, $1,000 par value bond selling at $1,150 is

A firm has determined its cost of each source of capital and optimal capital structure, which is composed of the following sources and target market value proportions: If the firm were to shift toward a more leveraged capital structure (i.e., a greater percentage of debt in the capital structure), the weighted average cost of capital would

A corporation has concluded that its financial risk premium is too high. In order to decrease this, the firm can

Target weights are either book value or market value weights based on desired capital structure proportions.

The ________ is a weighted average of the cost of funds which reflects the interrelationship of financing decisions.

A company's historical target capital structure is 40 percent debt and 60 percent equity. The company expects to issue more equity in the upcoming year moving its capital structure to 50 percent debt and 50 percent equity for the long term. The company should use the current 40 percent debt/60 equity for its average weighted cost of capital.

The target capital structure is the desired optimal mix of debt and equity financing that most firms attempt to achieve and maintain.

The preferred capital structure weights to be used in the weighted average cost of capital are

Weighing schemes for calculating the weighted average cost of capital include all of the following EXCEPT

When determining the after-tax cost of a bond, the face value of the issue must be adjusted to the net proceeds amounts by considering

Preferred stock represents a special type of ownership interest in the firm. Preferred stockholders must receive their stated dividends prior to the distribution of any earnings to common stockholders and bondholders.

The cost of capital reflects the cost of funds over the long run measured at a given point in time, based on the best information available.

The cost of common stock equity may be estimated by using the

Table 9.1 A firm has determined its optimal capital structure which is composed of the following sources and target market value proportions. Debt: The firm can sell a 12-year, $1,000 par value, 7 percent bond for $960. A flotation cost of 2 percent of the face value would be required in addition to the discount of $40. Preferred Stock: The firm has determined it can issue preferred stock at $75 per share par value. The stock will pay a $10 annual dividend. The cost of issuing and selling the stock is $3 per share. Common Stock: A firm's common stock is currently selling for $18 per share. The dividend expected to be paid at the end of the coming year is $1.74. Its dividend payments have been growing at a constant rate for the last four years. Four years ago, the dividend was $1.50. It is expected that to sell, a new common stock issue must be underpriced $1 per share in floatation costs. Additionally, the firm's marginal tax rate is 40 percent. -The weighted average cost of capital after all retained earnings are exhausted is ________. (See Table 9.1)

A firm has determined its cost of each source of capital and optimal capital structure, which is composed of the following sources and target market value proportions: The weighted average cost of capital is

If a corporation has an average tax rate of 40 percent, the approximate annual, after-tax cost of debt for a 10-year, 8 percent, $1,000 par value bond selling at $1,150 is

The marginal cost of capital necessary to raise the next marginal dollar of financing is relevant for evaluating the firm's future investment opportunities.

Flotation costs reduce the net proceeds from the sale of a bond whether sold at a premium, at a discount, or at its par value.

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 the firm as measured by the beta coefficient.