Exam 11: Calculating the Cost of Capital

An all-equity firm is considering the projects shown as follows.The T-bill rate is 3 percent and the market risk premium is 6 percent.If the firm uses its current WACC of 12 percent to evaluate these projects,which project(s),if any,will be incorrectly rejected?

When calculating the weighted average cost of capital,weights are based on:

Which of these makes this a true statement? When determining the appropriate weights used in calculating a WACC,it should reflect:

The ________ approach to computing a divisional weighted average cost of capital (WACC)requires only that WACCs for "risky" and "relatively safe" divisions be adjusted.

A firm has 5,000,000 shares of common stock outstanding,each with a market price of $8.00 per share.It has 25,000 bonds outstanding,each selling for $1,100 with a $1,000 face value.The bonds mature in 12 years,have a coupon rate of 9 percent,and pay coupons semi-annually.The firm's equity has a beta of 1.4,and the expected market return is 15 percent.The tax rate is 35 percent and the WACC is 14 percent.Calculate the risk-free rate.

OMG Inc.has 4 million shares of common stock outstanding,3 million shares of preferred stock outstanding,and 50 thousand bonds.If the common shares are selling for $21 per share,the preferred shares are selling for $10 per share,and the bonds are selling for 111 percent of par ($1,000),what weight should you use for debt in the computation of OMG's WACC?

FDR Industries has 50 million shares of stock outstanding selling at $30 per share and an issue of $200 million in 9.5 percent,annual coupon bonds with a maturity of 10 years,selling at 105 percent of par ($1,000).If FDR's weighted average tax rate is 28 percent and its cost of equity is 16 percent,what is FDR's WACC?

ADK Industries common shares sell for $60 per share.ADK expects to set their next annual dividend at $3.75 per share.If ADK expects future dividends to grow at 9 percent per year,indefinitely,the current risk-free rate is 4 percent,the expected rate on the market is 11 percent,and the stock has a beta of 1.5,what should be the best estimate of the firm's cost of equity?

Which of the following statements is correct?

Cup Cake Ltd.has 20 million shares of stock outstanding selling at $25 per share and an issue of $30 million in 8 percent,annual coupon bonds with a maturity of 16 years,selling at 98 percent of par ($1,000).If Cup 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 4 percent per year,indefinitely,what is its WACC?

Apple's 9 percent annual coupon bond has 10 years until maturity and the bonds are selling in the market for $790.If the firm's after-tax cost of debt is 8 percent,what was the firm's tax rate?

Which of the following will impact the cost of equity component in the weighted average cost of capital?

Tykes Toys' zero coupon bond has 10 years until maturity and the bonds are selling in the market for $650.If the firm's after-tax cost of debt is 11 percent,what was the firm's tax rate?

A firm uses only debt and equity in its capital structure.The firm's weight of debt is 40 percent.The firm could issue new bonds at a yield to maturity of 9 percent and the firm has a tax rate of 30 percent.If the firm's WACC is 11 percent,what is the firm's cost of equity?

A firm uses only debt and equity in its capital structure.The firm's weight of equity is 35 percent.The firm's cost of equity is 14 percent and it has a tax rate of 30 percent.If the firm's WACC is 11 percent,what is the firm's before-tax cost of debt?

TAFKAP Industries has 8 million shares of stock outstanding selling at $17 per share and an issue of $20 million in 7.5 percent,annual coupon bonds with a maturity of 15 years,selling at 109 percent of par ($1,000).If TAFKAP's weighted average tax rate is 34 percent and its cost of equity is 12.5 percent,what is TAFKAP's WACC?

When we adjust the WACC to reflect flotation costs,this approach:

Which of the following makes this a true statement? If the new project does significantly increase the firm's overall risk:

Which statement makes this a false statement? When a firm pays commissions to underwriting firms that float the issuance of new stock:

A firm uses only debt and equity in its capital structure.The firm's weight of debt is 45 percent.The firm could issue new bonds at a yield to maturity of 10 percent and the firm has a tax rate of 30 percent.If the firm's WACC is 12 percent,what is the firm's cost of equity?