Exam 11: Calculating the Cost of Capital

FarCry Industries,a maker of telecommunications equipment,has 26 million shares of common stock outstanding,1 million shares of preferred stock outstanding,and 10 thousand bonds.If the common shares sell for $12 per share,the preferred shares sell for $114.50 per share,and the bonds sell for 98 percent of par ($1,000),what weight should you use for preferred stock in the computation of FarCry's WACC?

Paper Exchange has 10 million shares of common stock outstanding,5 million shares of preferred stock outstanding,and 100 thousand bonds.If the common shares are selling for $25 per share,the preferred shares are selling for $10 per share,and the bonds are selling for 98 percent of par,what would be the weight used for preferred stock in the computation of Paper's WACC?

The reason that we do not use an after-tax cost of preferred stock is:

Solar Shades has 8 million shares of common stock outstanding,4 million shares of preferred stock outstanding,and 10 thousand bonds.If the common shares are selling for $13 per share,the preferred shares are selling for $30 per share,and the bonds are selling for 105 percent of par,what would be the weight used for equity in the computation of Solar Shades' WACC?

ADK has 30,000 15-year 9 percent annual coupon bonds outstanding.If the bonds currently sell for 111 percent of par and the firm pays an average tax rate of 36 percent,what will be the before-tax and after-tax component cost of debt?

Which of the following is a principle of capital budgeting which states that the calculations of cash flows should remain independent of financing?

Which of these statements is true regarding divisional WACC?

An estimated WACC computed using some sort of proxy for the average equity risk of the projects in a particular business unit is known as the:

PAW Industries has 5 million shares of common stock outstanding with a market price of $8.00 per share.The company also has outstanding preferred stock with a market value of $10 million,and 100,000 bonds outstanding,each with face value $1,000 and selling at 96 percent of par value.The cost of equity is 19 percent,the cost of preferred stock is 15 percent,and the cost of debt is 9 percent.If PAW's tax rate is 34 percent,what is the WACC?

Fern has preferred stock selling for 95 percent of par that pays an 8 percent annual coupon.What would be Fern's component cost of preferred stock?

Diddy Corp.stock has a beta of 1.0,the current risk-free rate is 5 percent,and the expected return on the market is 15.5 percent.What is Diddy's cost of equity?

Suppose your firm has decided to use a divisional WACC approach to analyze projects.The firm currently has 2 divisions,A and B,with betas for each division of 0.5 and 1.5,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)is 14 percent and the after-tax yield on the company's bonds is 6 percent,what are the WACCs for divisions A and B?

IVY has preferred stock selling for 98 percent of par that pays a 7 percent annual coupon.What would be IVY's component cost of preferred stock?

Suppose that Tan Lines' common shares sell for $20 per share,are expected to set their next annual dividend at $1.00 per share,and that all future dividends are expected to grow by 5 percent per year,indefinitely.If Tan Lines faces a flotation cost of 10 percent on new equity issues,what will be the flotation-adjusted cost of equity?

Which of the following statements is correct?

Uptown Inc.has preferred stock selling for 102 percent of par that pays a 6 percent annual coupon.What would be Uptown's component cost of preferred stock?

Suppose that Model Nails,Inc.'s capital structure features 60 percent equity,40 percent debt,and that its before-tax cost of debt is 6 percent,while its cost of equity is 10 percent.If the appropriate weighted average tax rate is 28 percent,what will be Model Nails' WACC?

Which of the following is a reason why the divisional cost of capital approach may cause problems if new projects are assigned to the wrong division?

A firm uses only debt and equity in its capital structure.The firm's weight of debt is 75 percent.The firm could issue new bonds at a yield to maturity of 12 percent and the firm has a tax rate of 30 percent.If the firm's WACC is 13 percent,what is the firm's cost of equity?

Which of these statements is true regarding calculating weights for WACC?