Exam 11: Calculating the Cost of Capital

KatyDid Clothes has a $150 million ($1,000 face value)15-year bond issue selling for 106 percent of par that carries a coupon rate of 8 percent,paid semi-annually.What would be KatyDid's before-tax component cost of debt?

Oberon Inc.has a $20 million ($1,000 face value)10-year bond issue selling for 99 percent of par that pays an annual coupon of 7.25 percent.What would be Oberon's before-tax component cost of debt?

Bill's Boards has 20 million shares of common stock outstanding,4 million shares of preferred stock outstanding,and 20 thousand bonds.If the common shares are selling for $30 per share,the preferred shares are selling for $17 per share,and the bonds are selling for 96 percent of par,what would be the weight used for debt in the computation of Bill's WACC?

Which of these is an estimated WACC computed using some sort of proxy for the average equity risk of the projects in a particular division?

Which of the following statements is correct?

FlavR Co.stock has a beta of 2.0,the current risk-free rate is 2,and the expected return on the market is 9 percent.What is FlavR Co's cost of equity?

Which of the following statements is correct?

Suppose that Wave Runners' common shares sell for $35 per share,are expected to set their next annual dividend at $2.00 per share,and that all future dividends are expected to grow by 10 percent per year,indefinitely.If Wave faces a flotation cost of 15 percent on new equity issues,what will be the flotation-adjusted cost of equity?

Which of the following will directly impact the cost of equity?

An all-equity firm is considering the projects shown as follows.The T-bill rate is 4 percent and the market risk premium is 7 percent.If the firm uses its current WACC of 12 percent to evaluate these projects,which project(s),if any,will be incorrectly accepted or rejected?

WC Inc.has a $10 million (face value),10-year bond issue selling for 99 percent of par that pays an annual coupon of 9 percent.What would be WC's before-tax component cost of debt?

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.

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?

Which of the following will directly impact the cost of debt?

CJ Co.stock has a beta of 0.9,the current risk-free rate is 5.6,and the expected return on the market is 13 percent.What is CJ Co's cost of equity?

Accessory Industries has 2 million shares of common stock outstanding,1 million shares of preferred stock outstanding,and 100 thousand bonds.If the common shares are selling for $22 per share,the preferred shares are selling for $10.50 per share,and the bonds are selling for 96 percent of par ($1,000),what would be the weights used in the calculation of Accessory's WACC for common stock,preferred stock,and bonds,respectively?

Johnny Cake Ltd.has 10 million shares of stock outstanding selling at $20 per share and an issue of $50 million in 8 percent,annual coupon bonds with a maturity of 13 years,selling at 93.5 percent of par ($1,000).If Johnny 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 5 percent per year,indefinitely,what is its WACC?

ADK has 30,000 15-year 9 percent semi-annual coupon bonds outstanding.If the bonds currently sell for 90 percent of par and the firm pays an average tax rate of 32 percent,what will be the before-tax and after-tax component cost of debt?

FarCry Industries,a maker of telecommunications equipment,has 6 million shares of common stock outstanding,1 million shares of preferred stock outstanding,and 10 thousand bonds.If the common shares are selling for $27 per share,the preferred shares are selling for $15 per share,and the bonds are selling for 119 percent of par ($1,000),what weight should you use for debt in the computation of FarCry's WACC?

Which of these are fees paid by firms to investment bankers for issuing new securities?