Exam 11: Calculating the Cost of Capital

Which of the following is a true statement?

XYZ Industries has 10 million shares of stock outstanding selling at $10 per share and an issue of $30 million in 8.5 percent,annual coupon bonds with a maturity of 25 years,selling at 102 percent of par ($1,000).If XYZ's weighted average tax rate is 40 percent and its cost of equity is 15 percent,what is XYZ's WACC?

Suppose that Beach Blanket's common shares sell for $55 per share,are expected to set their next annual dividend at $3.00 per share,and that all future dividends are expected to grow by 8 percent per year,indefinitely.If Beach faces a flotation cost of 10 percent on new equity issues,what will be the flotation-adjusted cost of equity?

Amino Industries common shares sell for $100 per share.Amino expects to set their next annual dividend at $4.00 per share.If Amino expects future dividends to grow at 5 percent per year,indefinitely,the current risk-free rate is 2 percent,the expected rate on the market is 7 percent,and the stock has a beta of 1.5,what should be the best estimate of the firm's cost of equity?

Suppose that TNT,Inc.has a capital structure of 43 percent equity,23 percent preferred stock,and 34 percent debt.If the before-tax component costs of equity,preferred stock and debt are 15.4 percent,10 percent and 7 percent,respectively,what is TNT's WACC if the firm faces an average tax rate of 28 percent?

Suppose your firm has decided to use a divisional WACC approach to analyze projects.The firm currently has four divisions,A through D,with average betas for each division of 0.5,1.0,1.3 and 1.6,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 7 percent)is 14 percent and the after-tax yield on the company's bonds is 8 percent,what are the WACCs for divisions A through D?

Apple's 9 percent annual coupon bond has 10 years until maturity and the bonds are selling in the market for $1,190.If the firm's after-tax cost of debt is 5 percent,what was the firm's tax rate?

Rings N Things Industries has 40 million shares of common stock outstanding,20 million shares of preferred stock outstanding,and 50 thousand bonds.If the common shares are selling for $25 per share,the preferred shares are selling for $15 per share,and the bonds are selling for 100 percent of par ($1,000),what would be the weights used in the calculation of Rings' WACC for common stock,preferred stock,and bonds,respectively?

A firm has 1,000,000 shares of common stock outstanding,each with a market price of $10.00 per share.It has 15,000 bonds outstanding,each selling for $900 (with a face value of $1,000).The bonds mature in 15 years,have a coupon rate of 10 percent,and pay coupons semi-annually.The firm's equity has a beta of 1.5,and the expected market return is 20 percent.The tax rate is 35 percent and the WACC is 16 percent.What is the risk-free rate?

A firm has 5,000,000 shares of common stock outstanding,each with a market price of $10.00 per share.It has 55,000 bonds outstanding,each selling for $990 with a $1,000 face value.The bonds mature in 15 years,have a coupon rate of 8 percent,and pay coupons semi-annually.The firm's equity has a beta of 2.0,and the expected market return is 15 percent.The tax rate is 35 percent and the WACC is 16 percent.Calculate the risk-free rate.

TellAll has 10 million shares of common stock outstanding,20 million shares of preferred stock outstanding,and 100 thousand bonds.If the common shares are selling for $32 per share,the preferred shares are selling for $20 per share,and the bonds are selling for 106 percent of par,what would be the weight used for preferred stock in the computation of TellAll's WACC?

Suppose that T-shirts,Inc.'s capital structure features 25 percent equity,75 percent debt,and that its before-tax cost of debt is 8 percent,while its cost of equity is 12 percent.If the appropriate weighted average tax rate is 30 percent,what will be T-shirts' WACC?

Suppose a new project was going to be financed partially with retained earnings.What flotation costs should you use for retained earnings?

Which of these makes this a true statement? The WACC formula:

Suppose that Glamour Nails,Inc.'s capital structure features 30 percent equity,70 percent debt,and that its before-tax cost of debt is 4 percent,while its cost of equity is 10 percent.If the appropriate weighted average tax rate is 34 percent,what will be Glamour Nails' WACC?

Carrie D's has 6 million shares of common stock outstanding,2 million shares of preferred stock outstanding,and 10 thousand bonds.If the common shares are selling for $15 per share,the preferred shares are selling for $28 per share,and the bonds are selling for 109 percent of par,what would be the weight used for equity in the computation of Carrie D's WACC?

An average of which of the following will give a fairly accurate estimate of what a project's beta will be?

Paper Exchange has 80 million shares of common stock outstanding,60 million shares of preferred stock outstanding,and 50 thousand bonds.If the common shares are selling for $20 per share,the preferred shares are selling for $10 per share,and the bonds are selling for 105 percent of par,what would be the weight used for preferred stock in the computation of Paper's WACC?

Which of the following statements is correct?

An all-equity firm is considering the projects shown as follows. The T-bill rate is 4 percent and the market risk premium is 8 percent.If the firm uses its current WACC of 13 percent to evaluate these projects,which project(s)will be incorrectly accepted?