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Exam 12: Cost of Capital

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Question 21

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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.

F) C) and E)
G) None of the above

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Question 22

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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

F) C) and D)
G) A) and C)

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Question 23

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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. 

Birds of a Feather has bonds outstanding that carry an annual coupon of 6 percent.The bonds mature in 11 years and are currently priced at 94 percent of face value.What is the firm's pretax cost of debt?

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

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

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

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?

Three years ago,the Morgan Co.issued 15-year,6.5 percent semiannual coupon bonds at par.Today,the bonds are quoted at 100.6.What is this firm's pretax cost of debt?

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

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

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?

Tim's Tools just issued a dividend of $2.22 per share on its common stock.The company is expected to maintain a constant 2.8 percent growth rate in its dividends indefinitely.If the stock sells for $19 a share,what is the company's cost of equity?

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:

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?

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?

You are given the following information concerning Around Town Tours: Debt: 7,500,6.8 percent coupon bonds outstanding,with 11 years to maturity and a quoted price of 97.9.These bonds pay interest semiannually. Common stock: 284,000 shares of common stock selling for $68 per share.The stock has a beta of 1.04 and will pay a dividend of $2.62 next year.The dividend is expected to grow by 2.5 percent per year indefinitely. Preferred stock: 9,000 shares of $8 preferred stock selling at $88 per share. Market: 14) 6 percent expected return,4.1 percent risk-free rate Company: 34 percent tax rate Calculate the WACC for this firm.

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:

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.)

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?