Deck 12: Cost of Capital

Question 1

A firm has a return on equity of 12.4 percent according to the dividend growth model and a return of 18.7 percent according to the capital asset pricing model.The market rate of return is 13.5 percent.What rate should the firm use as the cost of equity when computing the firm's weighted average cost of capital (WACC)?

A)12.4 percent because it is lower than 18.7 percent
B)18.7 percent because it is higher than 12.4 percent
C)The arithmetic average of 12.4 percent and 18.7 percent
D)The arithmetic average of 12.4 percent, 13.5 percent, and 18.7 percent
E)13.5 percent

Answer 1

The arithmetic average of 12.4 percent and 18.7 percent

Question 2

Assume a firm has a beta of 1.2.All else held constant, the cost of equity for this firm will increase if the:

A)market risk premium decreases.
B)risk-free rate decreases.
C)market rate of return decreases.
D)beta decreases.
E)either the risk-free rate or the market rate of return decreases.

Answer 2

risk-free rate decreases.

Question 3

The results of the dividend growth model:

A)vary directly with the market rate of return.
B)can only be applied to projects that have a growth rate equal to that of the current firm.
C)are highly dependent upon the beta used in the model.
D)are sensitive to the rate of dividend growth.
E)are most reliable when the growth rate exceeds 10 percent.

Answer 3

are sensitive to the rate of dividend growth.

Question 4

Which one of the following will increase the cost of equity, all else held constant?

A)Increase in the dividend growth rate
B)Decrease in beta
C)Decrease in future dividends
D)Increase in stock price
E)Decrease in market risk premium

Question 5

Katie owns 100 shares of ABC stock.Which one of the following terms is used to refer to the return that Katie and the other shareholders require on their investment in ABC?

A)Weighted average cost of capital
B)Pure play cost
C)Cost of equity
D)Subjective cost
E)Cost of debt

Question 6

Black Stone Furnaces wants to build a new facility.The cost of capital for this investment is primarily dependent on which one of the following?

A)The firm's overall source of funds
B)Source of the funds used to build the facility
C)Current tax rate
D)The nature of the investment
E)Firm's historical average rate of return

Question 7

Which one of the following will decrease the aftertax cost of debt for a firm?

A)Decrease in the firm's beta
B)Increase in tax rates
C)Increase in the risk-free rate of return
D)Decrease in the market price of the debt
E)Increase in a bond's yield to maturity

Question 8

Which one of the following statements is correct related to the dividend growth model approach to computing the cost of equity?

A)The rate of growth must exceed the required rate of return.
B)The rate of return must be adjusted for taxes.
C)The annual dividend used in the computation must be for Year 1 if you are Time 0's stock price to compute the return.
D)The cost of equity is equal to the return on the stock plus the risk-free rate.
E)The cost of equity is equal to the return on the stock multiplied by the stock's beta.

Question 9

Ted is trying to decide what cost of capital he should assign to a project.Which one of the following should be his primary consideration in this decision?

A)Amount of debt used to finance the project
B)Use, or lack, of preferred stock as a financing option
C)Mix of funds used to finance the project
D)Risk level of the project
E)Length of the project's life

Question 10

Farmer's Supply is considering opening a clothing store, which would be a new line of business for the firm.Management has decided to use the cost of capital of a similar clothing store as the discount rate to evaluate this proposed expansion.Which one of the following terms describes this evaluation approach?

A)Equity approach
B)Aftertax approach
C)Subjective approach
D)Market play
E)Pure play approach

Question 11

When evaluating a project, the dividend growth model:

A)can only be used by firms that pay increasing dividends.
B)must be used by all dividend-paying firms.
C)is only applicable when the growth rate of the project exceeds the dividend growth rate.
D)is relatively simple to use.
E)must use the growth rate of the project as the rate of growth in the formula.

Question 12

Kate is the CFO of a major firm and has the job of assigning discount rates to each project under consideration.Kate's method of doing this is to assign an incrementally higher rate as the risk level of the project increases and a lower rate as the risk level declines.Kate is applying the ___ approach.

A)pure play
B)divisional rating
C)subjective
D)straight WACC
E)equity rating

Question 13

The weighted average cost of capital is defined as the weighted average of a firm's:

A)return on all of its investments.
B)cost of equity, cost of preferred, and its aftertax cost of debt.
C)pretax cost of debt and its preferred and common equity securities.
D)bond coupon rates.
E)common and preferred stock.

Question 14

An increase in a levered firm's tax rate will:

A)decrease the cost of preferred stock.
B)increase both the cost of preferred stock and debt.
C)decrease the firm's cost of capital.
D)decrease the cost of equity capital.
E)increase the firm's WACC.

Question 15

Which statement is true?

A)An increase in the market value of preferred stock will increase a firm's weighted average cost of capital.
B)The cost of preferred stock is unaffected by the issuer's tax rate.
C)Preferred stock is generally the cheapest source of capital for a firm.
D)The cost of preferred stock remains constant from year to year.
E)Preferred stock is valued using the capital asset pricing model.

Question 16

The cost of preferred stock:

A)increases when a firm's tax rate decreases.
B)is constant over time.
C)is unaffected by changes in the market price of the stock.
D)is equal to the stock's dividend yield.
E)increases as the price of the stock increases.

Question 17

All else constant, an increase in a firm's cost of debt:

A)could be caused by an increase in the firm's tax rate.
B)will result in an increase in the firm's cost of capital.
C)will lower the firm's weighted average cost of capital.
D)will lower the firm's cost of equity.
E)will increase the firm's capital structure weight of debt.

Question 18

Which one of the following is used as the pretax cost of debt?

A)Average coupon rate on the firm's outstanding bonds
B)Coupon rate on the firm's latest bond issue
C)Weighted average yield to maturity on the firm's outstanding debt
D)Average current yield on the firm's outstanding debt
E)Annual interest divided by the market price per bond for the latest bond issue

Question 19

In an efficient market, the cost of equity for a highly risky firm:

A)will be less than the market rate but higher than the risk-free rate.
B)must equal the market rate of return.
C)changes by 1 percent for every 1 percent change in the risk-free rate.
D)decreases as the beta of the firm's stock increases.
E)increases in direct relation to the stock's systematic risk.

Question 20

Lester lent money to The Corner Store by purchasing bonds issued by the store.The rate of return that he and the other lenders require is referred to as the:

A)pure play cost.
B)cost of debt.
C)weighted average cost of capital.
D)subjective cost.
E)cost of equity.

Question 21

A firm uses its weighted average cost of capital to evaluate the proposed projects for all of its varying divisions.By doing so, the firm:

A)automatically gives preferential treatment in the allocation of funds to its riskiest division.
B)encourages the division managers to recommend only their most conservative projects.
C)maintains the current risk level and capital structure of the firm.
D)automatically maximizes the total value created for its shareholders.
E)allocates capital funds evenly among its divisions.

Question 22

The cost of capital for a project depends primarily on which one of the following?

A)Source of funds used for the project
B)Division within the firm that undertakes the project
C)Project's modified internal rate of return
D)How the project uses its funds
E)Project's fixed costs

Question 23

You want to use the pure play approach to assign a cost of capital to a proposed investment.Which one of the following characteristics should you most concentrate on as you search for an appropriate pure play firm?

A)Firm size
B)Firm location
C)Firm experience
D)Firm operations
E)Firm management

Question 24

Which one of the following statements is accurate for a levered firm?

A)WACC should be used as the required return for all proposed investments.
B)A firm's WACC will decrease whenever the firm's tax rate decreases.
C)An increase in the market risk premium will decrease a firm's WACC.
D)The subjective approach totally ignores a firm's own WACC.
E)A reduction in the risk level of a firm will tend to decrease the firm's WACC.

Question 25

A firm has a cost of equity of 13 percent, a cost of preferred of 11 percent, an aftertax cost of debt of 5.2 percent, and a tax rate of 35 percent.Given this, which one of the following will increase the firm's weighted average cost of capital?

A)Increasing the firm's tax rate
B)Issuing new bonds at par
C)Redeeming shares of common stock
D)Increasing the firm's beta
E)Increasing the debt-equity ratio

Question 26

Which one of the following represents the minimum rate of return a firm must earn on its assets if it is to maintain the current value of its securities?

A)Cost of equity
B)Pretax cost of debt
C)Aftertax cost of debt
D)Weighted average cost of capital
E)Weighted average cost of preferred and common stock

Question 27

Which one of the following is most apt to cause a wise manager to increase a project's cost of capital? Assume the firm is levered.

A)Management decides to issue new stock to finance the project.
B)The initial cash outlay requirement is reduced.
C)She learns the project is riskier than previously believed.
D)The aftertax cost of debt just decreased.
E)The project's life is shortened.

Question 28

Which one of the following will affect the capital structure weights used to compute a firm's weighted average cost of capital?

A)Decrease in the book value of a firm's equity
B)Decrease in a firm's tax rate
C)Increase in the market value of the firm's common stock
D)Increase in the market risk premium
E)Increase in the firm's beta

Question 29

When using the pure play approach for a proposed investment, a firm is primarily seeking a rate of return that:

A)is based on the actual source of funds that will be used to fund the project.
B)creates a positive net present value for the project.
C)reflects the size and life of the project.
D)most closely correlates with the proposed investment's internal rate of return.
E)best matches the risk level of the proposed investment.

Question 30

Derek's is a brick-and-mortar toy store.The firm is considering expanding its operations to include Internet sales.Which one of the following would be the best firm to use in a pure play approach to analyzing this proposed expansion?

A)Another brick-and-mortar store that also sells online
B)A wholesale toy distributor
C)A toy store that sells online only
D)The oldest online retailer of any product
E)Derek's own store

Question 31

Which one of the following statements is correct? Assume the pretax cost of debt is less than the cost of equity.

A)A firm may change its capital structure if the government changes its tax policies.
B)A decrease in the dividend growth rate increases the cost of equity.
C)A decrease in the systematic risk of a firm will increase the firm's cost of capital.
D)A decrease in a firm's debt-equity ratio will decrease the firm's cost of capital.
E)The cost of preferred stock decreases when the tax rate increases.

Question 32

Boone Brothers remodels homes and replaces windows.Ace Builders constructs new homes.If Boone Brothers considers expanding into new home construction, it should evaluate the expansion project using which one of the following as the required return for the project?

A)Boone Brothers' cost of capital
B)Ace Builders' cost of capital
C)Average of Boone Brothers' and Ace Builders' cost of capital
D)Lower of Boone Brothers' or Ace Builders' cost of capital
E)Higher of Boone Brothers' or Ace Builders' cost of capital

Question 33

All else constant, the weighted average cost of capital for a risky, levered firm will decrease if:

A)the firm's bonds start selling at a premium rather than at a discount.
B)the market risk premium increases.
C)the firm replaces some of its debt with preferred stock.
D)corporate taxes are eliminated.
E)the dividend yield on the common stock increases.

Question 34

Old Town Industries has three divisions.Division X has been in existence the longest and has the most stable sales.Division Y has been in existence for five years and is slightly less risky than the overall firm.Division Z is the research and development side of the business.Given this, the firm should probably:

A)require the highest rate of return from Division X since it has been in existence the longest.
B)assign the highest cost of capital to Division Z because it is most likely the riskiest of the three divisions.
C)use the firm's WACC as the cost of capital for Division Z as it provides analysis for the entire firm.
D)use the firm's WACC as the cost of capital for Divisions A and B because they are part of the revenue-producing operations of the firm.
E)allocate capital funds evenly amongst the divisions to maintain the current capital structure of the firm.

Question 35

Kelly's uses the firm's WACC as the required return for some of its projects.For other projects, the firms uses a rate equal to WACC plus one percent, while another set of projects is assigned rates equal to WACC minus some amount.Which one of the following factors should be the key factor the firm uses to determine the amount of the adjustment it will make when assigning a discount rate to a specific project?

A)The current market rate of interest
B)Actual source of funds used to finance the project
C)The perceived risk level of project
D)The division within the firm that will be assigned to manage the project
E)The firm's current debt-equity ratio

Question 36

A firm that uses its weighted average cost of capital as the required return for all of its investments will:

A)maintain a constant value for its shareholders.
B)increase the risk level of the firm over time.
C)make the best possible accept and reject decisions related to those investments.
D)find that its cost of capital declines over time.
E)accept only the projects that add value to the firm's shareholders.

Question 37

Which one of the following statements concerning capital structure weights is correct?

A)Target capital structure rates for a firm are irrelevant to individual projects.
B)The weights are unaffected when a bond issue matures.
C)An increase in the debt-equity ratio will increase the weight of the common stock.
D)The repurchase of preferred stock will increase the weight of debt.
E)The issuance of additional shares of common stock will increase the weight of both the common and preferred stock.

Question 38

Which one of the following is the primary determinant of an investment's cost of capital?

A)Life of the investment
B)Amount of the initial cash outlay
C)The investment's level of risk
D)The source of funds used for the investment
E)The investment's net present value

Question 39

Kurt, who is a divisional manager, continually brags that his division's required return for its projects is one percent lower than the return required for any other division of the firm.Which one of the following most likely contributes the most to the lower rate requirement for Kurt's division?

A)Kurt tends to overestimate the projected cash inflows on his projects.
B)Kurt tends to underestimate the variable costs of his projects.
C)Kurt has the most efficiently managed division.
D)Kurt's division is less risky than the other divisions.
E)Kurt's projects are generally financed with debt while the other divisions' projects are financed with equity.

Question 40

Which statement is correct, all else held constant?

A)Beta is used to compute the return on equity and the standard deviation is used to compute the return on preferred.
B)A decrease in a firm's WACC will increase the attractiveness of the firm's investment options.
C)The aftertax cost of debt increases when the market price of a bond increases.
D)If you have both the dividend growth and the security market line's costs of equity, you should use the higher of the two estimates when computing WACC.
E)WACC is applicable only to firms that issue both common and preferred stock.

Question 41

Spartans has 6.5 percent bonds outstanding that mature in 18 years.The bonds pay interest semiannually and have a face value of $1,000.Currently, the bonds are selling for $985 each.What is the firm's pretax cost of debt?

A)6.77 percent
B)6.64 percent
C)6.94 percent
D)7.11 percent
E)6.20 percent

Question 42

Appalachian Mountain Goods has paid increasing dividends of $10, $.12, $.15, and $.20 a share over the past four years, respectively.The firm estimates that future increases in its dividends will be equal to the arithmetic average growth rate over these past four years.The stock is currently selling for $12.50 a share.The risk-free rate is 3.4 percent and the market risk premium is 8.1 percent.What is the cost of equity for this firm if its beta is 1.46?

A)18.34 percent
B)16.91 percent
C)19.78 percent
D)21.68 percent
E)22.03 percent

Question 43

Three years ago, the Fairchildress Co.issued 20-year, 7.75 percent semiannual coupon bonds at par.Today, the bonds are quoted at 102.6.What is this firm's pretax cost of debt?

A)57.32 percent
B)7.13 percent
C)7.48 percent
D)7.88 percent
E)7.34 percent

Question 44

The common stock of Silent Motors has a beta that is 5 percent greater than the overall market beta.Currently, the market risk premium is 8.25 percent while the U.S.Treasury bill is yielding 2.8 percent.What is the cost of equity for this firm?

A)11.66 percent
B)10.86 percent
C)11.81 percent
D)11.46 percent
E)10.75 percent

Question 45

The common stock of Serenity Homescapes has a beta of 1.21 and a standard deviation of 17.8 percent.The market rate of return is 13.5 percent and the risk-free rate is 3.2 percent.What is the cost of equity for this firm?

A)15.66 percent
B)13.61 percent
C)13.93 percent
D)16.25 percent
E)14.90 percent

Question 46

USA Manufacturing issued 30-year, 7.5 percent semiannual bonds 6 years ago.The bonds currently sell at 101 percent of face value.What is the firm's aftertax cost of debt if the tax rate is 35 percent?

A)4.82 percent
B)5.62 percent
C)3.76 percent
D)3.59 percent
E)4.40 percent

Question 47

City Equipment announced this morning that its next annual dividend will be decreased to $1.90 a share and that all future dividends will be decreased by an additional 1.9 percent annually.What is the current value per share if the required return is 16.8 percent?

A)$8.80
B)$10.16
C)$10.36
D)$9.88
E)$10.42

Question 48

Pride of Lions has bonds outstanding that carry an annual coupon of 5.75 percent.The bonds mature in 9 years and are currently priced at 98 percent of face value.What is the firm's pretax cost of debt?

A)6.04 percent
B)9.850 percent
C)8.60 percent
D)11.28 percent
E)12.02 percent

Question 49

Commercial Construction Builders has a beta of 1.34, a dividend growth rate of 2.1 percent for the foreseeable future, a stock price of $15 per share, and an expected annual dividend of $0.45 per share next year.The market rate of return is 12.8 percent and the risk-free rate is 4.2 percent.What is the firm's average cost of equity?

A)8.79 percent
B)10.41 percent
C)10.35 percent
D)10.77 percent
E)8.51 percent

Question 50

Mississippi Mud Products would like to issue new equity shares if its cost of equity declines to 9.5 percent.The company pays a constant annual dividend of $4.80 per share.What does the market price of the stock need to be for the firm to issue the new shares?

A)$49.33
B)$48.83
C)$50.53
D)$51.63
E)$52.13

Question 51

The market rate of return is 12.65 percent and the risk-free rate is 3.1 percent.Galaxy Co.has 15 percent more systematic risk than the overall market and has a dividend growth rate of 3.75 percent.The firm's stock is currently selling for $53 a share and has a dividend yield of 4.53 percent.What is the firm's average cost of equity?

A)11.18 percent
B)12.36 percent
C)10.87 percent
D)17.33 percent
E)12.16 percent

Question 52

KellyAnne Public Relations just paid an annual dividend of $1.27 on its common stock and increases its dividend by 3.4 percent annually.What is the rate of return on this stock if the current stock price is $38.56 a share?

A)6.81 percent
B)7.87 percent
C)7.04 percent
D)7.69 percent
E)7.82 percent

Question 53

Musical Charts just paid an annual dividend of $1.84 per share.This dividend is expected to increase by 2.1 percent annually.Currently, the firm has a beta of 1.12 and a stock price of $31 a share.The risk-free rate is 4.3 percent and the market rate of return is 13.2 percent.What is the cost of equity capital for this firm?

A)13.28 percent
B)11.21 percent
C)12.29 percent
D)11.95 percent
E)13.42 percent

Question 54

Fire Hydrant Pet Supply just paid its first annual dividend of $0.75 a share.The firm plans to increase the dividend by 2.9 percent per year indefinitely.What is the firm's cost of equity if the current stock price is $16.90 per share?

A)14.64 percent
B)7.47 percent
C)9.78 percent
D)4.33 percent
E)5.34 percent

Question 55

To value a non-dividend-paying firm, the terminal value used in the valuation calculation will most likely be based on a(n):

A)subjective value determined by the firm's senior managers.
B)salvage value of zero.
C)target ratio.
D)pure play rate of return.
E)expected book value of equity.

Question 56

What is the primary reason why the cash flow from assets (CFA) is adjusted when used to value a firm?

A)Depreciation is a non-cash expense so both it and the depreciation tax shield must be eliminated from the CFA.
B)Net working capital (NWC) is excluded from firm valuations so the change in NWC must be added back to the "normal" CFA calculation
C)Interest expense is a financing cost and thus the tax benefit of this expense needs to be eliminated from the CFA.
D)CFA is normally based on historical performance but since firm valuations are forward looking the CFA must be adjusted for timing.
E)The CFA must be lowered by the amount of the noncash expenses to ascertain a more accurate firm value.

Question 57

Trendsetters has a cost of equity of 14.6 percent.The market risk premium is 8.4 percent and the risk-free rate is 3.9 percent.The company is acquiring a competitor, which will increase the company's beta to 1.4.What effect, if any, will the acquisition have on the firm's cost of equity capital?

A)No effect
B)Decrease of .62 percent
C)Decrease of .84 percent
D)Increase of 1.06 percent
E)Increase of .13 percent

Question 58

Madison Square Stores has a $20 million bond issue outstanding that currently has a market value of $19.4 million.The bonds mature in 6.5 years and pay semiannual interest payments of $35 each.What is the firm's pretax cost of debt?

A)8.21 percent
B)7.59 percent
C)7.08 percent
D)7.74 percent
E)7.80 percent

Question 59

A firm has multiple divisions of similar nature, yet varying degrees of risk.Which one of the following would be the most appropriate, yet relatively easy, means of assigning discount rates to each of its numerous proposed investments?

A)Assign every project a rate equal to the firm's cost of equity
B)Assign every investment a random rate that varies between the firm's cost of debt and its cost of equity
C)Assign every project a rate equal to the firm's WACC plus or minus a subjective adjustment
D)Determine the best pure play rate for each project
E)Assign every project a rate equal to the market rate of return at the time of the proposal

Question 60

Electronic Products has 22,500 bonds outstanding that are currently quoted at 101.6.The bonds mature in 8 years and pay an annual coupon payment of $90.What is the firm's aftertax cost of debt if the applicable tax rate is 34 percent?

A)5.47 percent
B)4.79 percent
C)5.75 percent
D)6.98 percent
E)6.67 percent

Question 61

Bermuda Cruises issues only common stock and coupon bonds.The firm has a debt-equity ratio of .45.The cost of equity is 17.6 percent and the pretax cost of debt is 8.9 percent.What is the capital structure weight of the firm's equity if the firm's tax rate is 35 percent?

A)66.75 percent
B)49.97 percent
C)52.93 percent
D)59.08 percent
E)68.97 percent

Question 62

Gulf Coast Tours currently has a weighted average cost of capital of 12.4 percent based on a combination of debt and equity financing.The firm has no preferred stock.The current debt-equity ratio is .47 and the aftertax cost of debt is 6.1 percent.The company just hired a new president who is considering eliminating all debt financing.All else constant, what will the firm's cost of capital be if the firm switches to an all-equity firm?

A)15.45 percent
B)12.92 percent
C)12.89 percent
D)13.37 percent
E)15.36 percent

Question 63

The Five and Dime Store has a cost of equity of 14.8 percent, a pretax cost of debt of 6.7 percent, and a tax rate of 34 percent.What is the firm's weighted average cost of capital if the debt-equity ratio is .46?

A)10.18 percent
B)11.72 percent
C)11.53 percent
D)13.49 percent
E)14.93 percent

Question 64

Cromwell's Interiors is considering a project that is equally as risky as the firm's current operations.The firm has a cost of equity of 15.4 percent and a pretax cost of debt of 8.9 percent.The debt-equity ratio is .46 and the tax rate is 34 percent.What is the cost of capital for this project?

A)11.97 percent
B)12.40 percent
C)11.02 percent
D)11.62 percent
E)12.38 percent

Question 65

Piedmont Hotels is an all-equity firm with 48,000 shares of stock outstanding.The stock has a beta of 1.19 and a standard deviation of 14.8 percent.The market risk premium is 7.8 percent and the risk-free rate of return is 4.1 percent.The company is considering a project that it considers riskier than its current operations so has assigned an adjustment of 1.35 percent to the project's discount rate.What should the firm set as the required rate of return for the project?

A)9.85 percent
B)10.92 percent
C)15.39 percent
D)14.73 percent
E)17.33 percent

Question 66

A firm wants to create a WACC of 11.2 percent.The firm's cost of equity is 16.8 percent and its pretax cost of debt is 8.7 percent.The tax rate is 35 percent.What does the debt-equity ratio need to be for the firm to achieve its target WACC?

A).86
B).67
C)1.04
D).94
E)1.01

Question 67

The 5.25 percent preferred stock of Robert Bruce Security is selling for $50.26 a share.What is the firm's cost of preferred stock if the tax rate is 21 percent and the par value per share is $100?

A)8.57 percent
B)9.20 percent
C)10.45percent
D)11.86 percent
E)10.21 percent

Question 68

Santa Claus Enterprises has 87,000 shares of common stock outstanding at a current price of $39 a share.The firm also has two bond issues outstanding.The first bond issue has a total face value of $230,000, pays 7.1 percent interest annually, and currently sells for 103.1 percent of face value.The second bond issue consists of 5,000 bonds that are selling for $887 each.These bonds pay 6.5 percent interest annually and mature in eight years.The tax rate is 35 percent.What is the capital structure weight of the firm's debt?

A)57.93 percent
B)51.39 percent
C)55.50 percent
D)60.52 percent
E)71.86 percent

Question 69

Orchard Farms has a pretax cost of debt of 7.29 percent and a cost of equity of 16.3 percent.The firm uses the subjective approach to determine project discount rates.Currently, the firm is considering a project to which it has assigned an adjustment factor of 1.25 percent.The firm's tax rate is 35 percent and its debt-equity ratio is .48.The project has an initial cost of $3.9 million and produces cash inflows of $1.26 million a year for 5 years.What is the net present value of the project?

A)$421,619
B)$446,556
C)$514,370
D)$561,027
E)$478,721

Question 70

The Color Box uses a combination of common stock, preferred stock, and debt financing.The company wants preferred stock to represent 7 percent of the total financing.It also wants to structure the firm in a manner that will produce a weighted average cost of capital of 9.5 percent.The aftertax cost of debt is 4.8 percent, the cost of preferred is 8.9 percent, and the cost of common stock is 14.7 percent.What percentage of the firm's capital funding should be debt financing?

A)48.42 percent
B)52.03 percent
C)54.15 percent
D)44.78 percent
E)39.21 percent

Question 71

Western Electric has 21,000 shares of common stock outstanding at a price per share of $61 and a rate of return of 15.6 percent.The firm has 11,000 shares of $8 preferred stock outstanding at a price of $48 a share.The outstanding debt has a total face value of $275,000 and currently sells for 104 percent of face.The yield to maturity on the debt is 8.81 percent.What is the firm's weighted average cost of capital if the tax rate is 35 percent?

A)14.52 percent
B)13.44 percent
C)14.19 percent
D)14.37 percent
E)13.92 percent

Question 72

Design Interiors has a cost of equity of 14.9 percent and a pretax cost of debt of 8.6 percent.The firm's target weighted average cost of capital is 11 percent and its tax rate is 34 percent.What is the firm's target debt-equity ratio?

A)1.37
B).87
C).98
D)1.02
E).73

Question 73

S&W has 21,000 shares of common stock outstanding at a price of $29 a share.It also has 2,000 shares of preferred stock outstanding at a price of $71 a share.The firm has 7 percent, 12-year bonds outstanding with a total market value of $386,000.The bonds are currently quoted at 100.6 percent of face and pay interest semiannually.What is the capital structure weight of the firm's preferred stock if the tax rate is 34 percent?

A)12.49 percent
B)9.00 percent
C)8.24 percent
D)11.84 percent
E)13.63 percent

Question 74

Great Lakes Packing has two bond issues outstanding.The first issue has a coupon rate of8 percent, matures in 6 years, has a total face value of $5 million, and is quoted at 101.2 percent of face value.The second issue has a 7.5 percent coupon, matures in 13 years, has a total face value of $18 million, and is quoted at 99 percent of face value.Both bonds pay interest semiannually.What is the firm's weighted average aftertax cost of debt if the tax rate is 34 percent?

A)5.05 percent
B)5.12 percent
C)5.63 percent
D)5.95 percent
E)6.08 percent

Question 75

City Rentals has 44,000 shares of common stock outstanding at a market price of $32 a share.The common stock just paid a $1.50 annual dividend and has a dividend growth rate of 2.5 percent.There are 7,500 shares of $9 preferred stock outstanding at a market price of $72 a share.The outstanding bonds mature in 11 years, have a total face value of $825,000, a face value per bond of $1,000, and a market price of $989 each, and a pretax yield to maturity of 8.3 percent.The tax rate is 35 percent.What is the firm's weighted average cost of capital?

A)7.76 percent
B)8.68 percent
C)9.29 percent
D)9.97 percent
E)10.30 percent

Question 76

Country Cook's cost of equity is 16.2 percent and its aftertax cost of debt is 5.8 percent.What is the firm's weighted average cost of capital if its debt-equity ratio is .42 and the tax rate is 34 percent?

A)12.54 percent
B)11.47 percent
C)13.12 percent
D)12.28 percent
E)13.01 percent

Question 77

The 7 percent preferred stock of Midwest Muffler and Towing is selling for $65 per share.What is the firm's cost of preferred stock if the tax rate is 21 percent and the par value per share is $100?

A)12.79 percent
B)11.21 percent
C)11.46 percent
D)10.55 percent
E)10.77 percent

Question 78

The preferred stock of Dolphin Pools pays an annual dividend of $5.25 a share and sells for $48a share.The tax rate is 35 percent.What is the firm's cost of preferred stock?

A)9.67 percent
B)10.94 percent
C)15.07 percent
D)15.59 percent
E)16.47 percent

Question 79

Dee's Dress Emporium has 50,000 shares of common stock outstanding at a price of $27 a share.It also has 1000 shares of preferred stock outstanding at a price of $20 a share.There are 800bonds outstanding that have a semiannual coupon payment of $25.The bonds mature in four years, have a face value of $1,000, and sell at 97 percent of par.What is the capital structure weight of the common stock?

A)48.20 percent
B)50.00 percent
C)48.15 percent
D)62.91 percent
E)50.08 percent

Question 80

Beta Industries is considering a project with an initial cost of $6.9 million.The project will produce cash inflows of $1.52 million a year for seven years.The firm uses the subjective approach to assign discount rates to projects.For this project, the subjective adjustment is +2.2 percent.The firm has a pretax cost of debt of 9.1 percent and a cost of equity of 17.7 percent.The debt-equity ratio is .57 and the tax rate is 34 percent.What is the net present value of the project? (Round the answer to the nearest $100.)

A)-$698,400
B)-$187,100
C)$48,200
D)$333,300
E)$2,500