Exam 11: Calculating the Cost of Capital

Which of the following makes this a true statement? Ideally,when searching for a beta for a new line of business:

Suppose that TipsNToes,Inc.'s capital structure features 40 percent equity,60 percent debt,and that its before-tax cost of debt is 9 percent,while its cost of equity is 15 percent.If the appropriate weighted average tax rate is 34 percent,what will be TipsNToes' WACC?

TJ Industries has 7 million shares of common stock outstanding with a market price of $20.00 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 95 percent of par value.The cost of equity is 12 percent,the cost of preferred stock is 10 percent,and the cost of debt is 6.45 percent.If TJ's tax rate is 34 percent,what is the WACC?

A proxy beta is:

Sports Corp.has 10 million shares of common stock outstanding,5 million shares of preferred stock outstanding,and 1 million bonds.If the common shares are selling for $25 per share,the preferred shares are selling for $12.50 per share,and the bonds are selling for 97 percent of par,what would be the weight used for equity in the computation of Sports' WACC?

A firm uses only debt and equity in its capital structure.The firm's weight of equity is 70 percent.The firm's cost of equity is 13 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?

Which of the following is most correct?

Which of the following statements is correct?

Suppose that Tan Lotion's common shares sell for $18 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 7 percent per year,indefinitely.If Tan Lotion faces a flotation cost of 12 percent on new equity issues,what will be the flotation-adjusted cost of equity?

Which of the following statements is true?

Rose has preferred stock selling for 99 percent of par that pays a 9 percent annual coupon.What would be Rose's component cost of preferred stock?

Marme Inc.has preferred stock selling for 137 percent of par that pays an 11 percent annual dividend.What would be Marme's component cost of preferred stock?

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 $15 per share,the preferred shares sell for $114.50 per share,and the bonds sell for 101 percent of par ($1,000),what weight should you use for preferred stock in the computation of FarCry's WACC?

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 1.25 and 2.5,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 4 percent)is 12 percent and the after-tax yield on the company's bonds is 8 percent,what are the WACCs for divisions A and B?

OMG Inc.has 4 million shares of common stock outstanding,3 million shares of preferred stock outstanding,and 5 thousand bonds.If the common shares sell for $17 per share,the preferred shares sell for $126 per share,and the bonds sell for 117 percent of par ($1,000),what weight should you use for preferred stock in the computation of OMG's WACC?

A firm has 4,000,000 shares of common stock outstanding,each with a market price of $12.00 per share.It has 25,000 bonds outstanding,each selling for $980.The bonds mature in 20 years,have a coupon rate of 9 percent,and pay coupons semi-annually.The firm's equity has a beta of 1.5,and the expected market return is 15 percent.The tax rate is 30 percent and the WACC is 15 percent.What is the risk-free rate?

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)will be incorrectly rejected?

An objective approach to calculating divisional WACCs would be done by:

Sea Shell Industries has 50 million shares of common stock outstanding,10 million shares of preferred stock outstanding,and 100 thousand bonds.If the common shares are selling for $19 per share,the preferred shares are selling for $8.50 per share,and the bonds are selling for 97 percent of par ($1,000),what would be the weights used in the calculation of Sea Shell's WACC for common stock,preferred stock,and bonds,respectively?

ADK Industries common shares sell for $40 per share.ADK expects to set their next annual dividend at $1.75 per share.If ADK expects future dividends to grow at 7 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 1.2,what should be the best estimate of the firm's cost of equity?