Exam 9: The Cost of Capital

Weights that use accounting values to measure the proportion of each type of capital in the firm's financial structure are called market value weights.

Using the Capital Asset Pricing Model (CAPM), the cost of common stock equity is the return required by investors as compensation for the firm's nondiversifiable risk.

Debt is generally the least expensive source of capital. This is primarily due to

What would be the cost of retained earnings equity for Tangshan Mining if the expected return on U.S. Treasury Bills is 5.00%, the market risk premium is 10.00 percent, and the firm's beta is 1.3?

The specific cost of each source of long-term financing is based on ________ and ________ costs.

When the constant growth valuation model is used to find the cost of common stock equity capital, it can easily be adjusted for flotation costs to find the cost of new common stock; the Capital Asset Pricing Model (CAPM) does not provide a simple adjustment mechanism.

The cost of retained earnings is always lower than the cost of a new issue of common stock due to the absence of flotation costs when financing projects with retained earnings.

A firm has common stock with a market price of $25 per share and an expected dividend of $2 per share at the end of the coming year. The growth rate in dividends has been 5 percent. The cost of the firm's common stock equity is

The firm's optimal mix of debt and equity is called its

Generally the least expensive source of long-term capital is

The cost of capital is the rate of return a firm must earn on investments in order to leave share price unchanged.

The cost of capital is a dynamic concept; it is affected by economic and firm-specific factors such as business risk and financial risk.

A firm has common stock with a market price of $100 per share and an expected dividend of $5.61 per share at the end of the coming year. A new issue of stock is expected to be sold for $98, with $2 per share representing the underpricing necessary in the competitive capital market. Flotation costs are expected to total $1 per share. The dividends paid on the outstanding stock over the past five years are as follows: The cost of this new issue of common stock is

Tangshan Mining is considering issuing long-term debt. The debt would have a 30 year maturity and a 12 percent coupon rate and make semiannual coupon payments. In order to sell the issue, the bonds must be underpriced at a discount of 2.5 percent of face value. In addition, the firm would have to pay flotation costs of 2.5 percent of face value. The firm's tax rate is 33 percent. Given this information, the after tax cost of debt for Tangshan Mining would be

The cost of retained earnings is generally higher than both the cost of debt and cost of preferred stock.

One measure of the cost of common stock equity is the rate at which investors discount the expected dividends of the firm to determine its share value.

What would be the cost of new common stock equity for Tangshan Mining if the firm just paid a dividend of $4.25, the stock price is $55.00, dividends are expected to grow at 8.5 percent indefinitely, and flotation costs are $6.25 per share?

The net proceeds used in calculation of the cost of long-term debt are funds actually received from the sale after paying for flotation costs and taxes.

The cost of capital can be thought of as the "magic number" that is used to decide whether a proposed corporate investment will increase or decrease the firm's stock price.

Nico Trading Corporation is considering issuing long-term debt. The debt would have a 30 year maturity and a 10 percent coupon rate. In order to sell the issue, the bonds must be underpriced at a discount of 5 percent of face value. In addition, the firm would have to pay flotation costs of 5 percent of face value. The firm's tax rate is 35 percent. Given this information, the after tax cost of debt for Nico Trading would be