Exam 11: Calculating the Cost of Capital

Suppose that PAW,Inc.has a capital structure of 60 percent equity,10 percent preferred stock,and 30 percent debt.If the before-tax component costs of equity,preferred stock and debt are 17.5 percent,12 percent and 6.5 percent,respectively,what is PAW's WACC if the firm faces an average tax rate of 28 percent?

Any debt and preferred stock components of capital should:

Apple's 9 percent annual coupon bond has 10 years until maturity and the bonds are selling in the market for $890.The firm's tax rate is 36 percent.What is the firm's after-tax cost of debt?

An all-equity firm is considering the projects shown as follows. The T-bill rate is 4 percent and the market risk premium is 9 percent.If the firm uses its current WACC of 14 percent to evaluate these projects,which project(s)will be incorrectly rejected?

Which of the following is a true statement regarding the appropriate tax rate to be used in the WACC?

JackITs has 5 million shares of common stock outstanding,1 million shares of preferred stock outstanding,and 20 thousand bonds.If the common shares are selling for $28 per share,the preferred shares are selling for $13.50 per share,and the bonds are selling for 98 percent of par,what would be the weight used for equity in the computation of JackITs' WACC?

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

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

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

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 the following will increase the cost of equity?

When firms use multiple sources of capital,they need to calculate the appropriate discount rate for valuing their firm's cash flows as:

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

Pumpkin Pie Industries has 5 million shares of common stock outstanding,1 million shares of preferred stock outstanding,and 10 thousand bonds.If the common shares are selling for $50 per share,the preferred shares are selling for $31 per share,and the bonds are selling for 98 percent of par ($1,000),what would be the weights used in the calculation of Pumpkin Pie's WACC for common stock,preferred stock,and bonds,respectively?

Why do we use market-value weights instead of book-value weights?

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

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:

JAK Industries has 5 million shares of stock outstanding selling at $25 per share and an issue of $40 million in 8 percent,annual coupon bonds with a maturity of 15 years,selling at 108 percent of par ($1000).If JAK's weighted average tax rate is 34 percent and its cost of equity is 15 percent,what is JAK's WACC?

Tykes Toys' 8 percent annual coupon bond has 8 years until maturity and the bonds are selling in the market for $988.If the firm's after-tax cost of debt is 11.75 percent,what was the firm's tax rate?