ch11 cost of capital-question

docx

School

NorQuest College *

*We aren’t endorsed by this school

Course

2230

Subject

Finance

Date

Jan 9, 2024

Type

docx

Pages

Uploaded by BailiffArtLoris14

Expected cash dividends are $2.50, the dividend yield is 6%, flotation costs are 4%, and the growth rate is 3%. Compute cost of the new common stock. A. 9.00% B. 9.25% C. 9.18% D. 9.38% ***flotation cost does not effect the cost of retained earnings The dividend yield is the percentage of the company's current share price paid as dividends over the years. Conversely, the dividend rate is the amount of cash the company gives its shareholders per share. The cost of debt is equal to the current bond yield on bonds of similar risk class and adjusted for the corporate tax rate. TRUE

A firm's cost of preferred stock is equal to the preferred dividend divided by the net price after flotation costs Kp = (Dp/Po - F). TRUE The amount of debt capital used by a corporation is not related to the availability of equity funds from retained earnings and new common stock. FALSE Beta is a good measure of a stock's risk when the stock is combined into a portfolio. TRUE The SML helps us to identify the effects of several factors that can cause the cost of capital to change. TRUE Formula dividend yield= annual dividend per share/ price per share dividend discount model cost of new common stock(K)=expected cash dividend/net price per share net price per share=price per share*(1-F) 1. Expected cash dividends are $2.50, the dividend yield is 6%, flotation costs are 4%, and the growth rate is 3%. Compute cost of the new common stock . A. 9.00%

B. 9.25% C. 9.18% D. 9.38%  = Expected dividend yield+ estimated constant growth rate / (1 - flotation cost =6% + 3% /1-4%= 9.37 2. The Halifax Corporation has 70% of its capital structure in the form of equity capital. $150,000 in capital needs to be raised for a project but only $30,000 in funds is available through retained earnings. How much must be raised through common stock to maintain Halifax Corporation's capital structure? A. $105,000 B.$75,000 C.$120,000D. $21,000 150,000*70%-30000 A firm is paying an annual dividend of $3.63 for its preferred stock which is selling for $62.70. There is a selling cost of $3.30. What is the after tax cost of preferred stock if the firm's tax rate is 33%? A. 2.02%B. 4.09%C. 5.79%D. 6.11% Cost of preferred stock= dividend/ price – selling cost = 3.63/(62.70-3.30) The coupon rate on a debt issue is 12%. If the yield to maturity on the debt is 9.33%, whatis the after tax cost of debt (for a cost of capital

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

calculation) if the firm's tax rate is 34%? A. 3.17%B. 4.08%C. 6.16% D. 7.92% After tax cost of debt= YTM(1-T) yield to maturity =9.33(1-34%)= 6.1578 The coupon rate on an issue of debt is 12%. The yield to maturity on this issue is 14%. The corporate tax rate is 31%. What would be the approximate after tax cost of debt for a new issue of bonds? A. 4.34% B. 3.72% C. 9.66%

D. 8.28% The coupon rate on an issue of debt is 12%. The yield to maturity on this issue is 14%. The corporate tax rate is 31%. What would be the approximate after tax cost of debt for a newissue of bonds? A. 4.34%B. 3.72%C. 9. 66%D. 8.28% A firm's stock is selling for $85. The dividend yield is 5%. A 7% growth rate is expected for the common stock. The firm's tax rate is 32%. What is the firm's cost of common equity? A. 8.16% B. 12.00% C. 12.35% D. 10.40% Cost of common equity, Ke=D1/Po +g =85*5%/85 + 7%=12% A firm's stock is selling for $78. The next annual dividend is expected to be $2.34. The growth rate is 9%. The flotation cost is $5.00. What is the cost of retained earnings? A. 12.82%B. 12.21%C. 12.00%D. 9.41% Cost of retained earning, Ke=D1/Po +g =2.34/78 + 9%=12% The weighted average cost of capital for firm X is currently 10%. Firm X is considering a new project but must raise new debt to finance the project. Debt represents 25% of the capital structure. If the after tax

cost of debt will rise from 7% to 8%, what is the marginal cost of capital? A. 8.00%B. 10.25%C. 10.75%D. 12.00 WACC=10% Debt = 25% After tax cost weight wacc Debt 7 25% 1.75 Stock Equity Cost of capital 10 When debt 8% (8% * 25%=2) .25 more than initial cost..cost of capital now is 10.25 Firm X has a tax rate of 30%. The price of its new preferred stock is $63 and its flotation cost is $3.15. The cost of new preferred stock is 12%. What is the firm's dividend? A. $7.18B. $5.03C. $7.56D. $6.30 T=30%, Pp=$63, F=$3.15 Kp= 12% Kp= Dp/Pp-F 12%=Dp/63-3.13 = 7.1844 The after tax cost of debt will usually be below: A. the cost of dividends.B. the weighted average cost of capital less the cost of equity. C. the cost of equity. D. the floatation cost

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

. The general rule for using the weighted average cost of capital (WACC) in capital budgeting decisions is accept all projects with: A. rates of return greater than or equal to the WACC. (B. rates of return less than the WACC.C. rates of return equal to or less than the WACC.D. positive rates of retur A firm can issue $1,000 par value bond that pays $100 per year in interest at a price of $980. The bond will have a 5-year life. The firm is in a 35% tax bracket. What is the after tax cost of debt? A. 10.53%B. 10.20%C. 6.85%D. 6.50% Y? fc=1000, pmt=100, pv =-980, n=5 cmt i/y = 10.53 After tax cost of debt= y(1-T) =10.53(1-.65)= 6.85 If the investor desires less risk than the market, he or she: A. buys stocks with alphas of zero. B. buys stocks with betas less than 1.0.

C. makes sure the risk- free rate is higher than the expected market return. D. buys stocks only when the slope of the security market line is on a 45 degree angle. If the investor desires less risk than the market, he or she: A. buys stocks with alphas of zero. B. buys stocks with betas less than 1.0. C. makes sure the risk-free rate is higher than the expected market return.D. buys stocks only when the slope of the security market line is on a 45 degree angle. As investors become more pessimistic (risk averse): A. they require smaller premiums for taking risk.B. they require larger betas for taking risk. C. prices of securities fall in order to raise their expected rate of return. D. they invest in a portfolio with a high beta.

A firm's debt to equity ratio varies at times because: A. a firm will want to sell common stock when prices are low and bond when interest rates are high. B. a firm will want to take advantage of timing its fund raising in order to minimize costs over the long run. C. the market allows extensive leeway in the debt to equity ratio before penalizing the firm with a higher cost of capital.D. of the cyclical nature of the industry in which the firm operates. Expected cash dividends are $4.50, the dividend yield is 8%, flotation costs are 5%, and the growth rate is 4%. Compute cost of the new common stock. A. 13.00%B. 12.63%C. 8.42%D. 4.21% As investors become more pessimistic (risk averse): A. they require smaller premiums for taking risk. B. they require larger betas for taking risk.

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

C. prices of securities fall in order to raise their expected rate of return. D. they invest in a portfolio with a high beta. Step 1 dividend yield= annual dividend per share/ price per share,, rearrange the formula,, price per share=4.50/8%=56.25 Step 2: net price per share=price per share*(1-F) 56.25*(1-5%) = 53.44 Step 3 : cost of new common stock(K)=(expected cash dividend/net price per share)+growth rate = 4.50/ 53.44)+ 4% = 12.42 closest answer is 12.63% Another way to solve this problem The calculated value of the cost of new common stock is option The required rate of return on the stock is given by:  = {Expected dividend yield / (1 - flotation cost)} + estimated constant growth rate  =8%(1−5%)+4%  =8%0.95+4%  = 8.42% + 4%  = 12.42%  Morgan Corporation has 60% of its capital

structure in the form of equity capital.  $200,000 in capital needs to be raised for a project but only $50,000 in funds is available  through retained earnings. How much must be raised through common stock to maintain  Morgan Corporation's capital structure?  A. $70,000

 B. $50,000  C. $120,000  D. $90,000 Morgan Corporation has 60% of its capital structure in the form of equity capital. $200,000 in capital needs to be raised for a project but only $50,000 in funds is available through retained earnings. How much must be raised through common stock to maintain Morgan Corporation's capital structure? A. $ 70,000B. $50,000C. $120,000D. $90,000 Total capital needed=200,000 Equity shARE= 2000,000*.6=120000 Equity to be raised= 120,000-50,000=70,000 A firm is paying an annual dividend of $2.50 for its preferred stock which is selling for $50.00. There is a selling cost of $4.00. What is the

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

after tax cost of preferred stock if the firm's tax rate is 33%? A. 5.00% B. 8.00% C. 5.43% D. 6.20% A firm is paying an annual dividend of $2.50 for its preferred stock which is selling for $50.00. There is a selling cost of $4.00. What is the after tax cost of preferred stock if the firm's tax rate is 33%? A. 5.00%B. 8.00%C. 5.43%D. 6.20% =Dp/Pp-F 2.5/50-46 The coupon rate on a debt issue is 13%. If the yield to maturity on the debt is 10%, what isthe after tax cost of debt (for a cost of capital calculation) if the firm's tax rate is 34%? A. 4.42%B. 3.00%C. 8.58%D. 6.60 10%(1-34%) The weighted average cost of capital for Patrick Corp. is currently 10%. Patrick Corp. is considering a new project but must raise new debt to finance the project. Debt represents 25%of the capital structure. If the after tax cost of debt will rise from 6% to 10%, what is the marginal cost of capital? A. 10.25%B. 10.75%C. 11.00%D. 11.50%

Waac =10% DEBT=25% COST OF DEBT= 25%*6%= 1.5 NEW COST OF DEBT= 25%* 10%= 2.5 DIFFERENCE IN DEBT COST OR MARGINAL DEBT COST= 1 SO MARGINAL COST OF CAPITAL WILL GO UP BY 1% A firm can issue $1,000 par value bond that pays $90 per year in interest at a price of $950. The bond will have a 10-year life. The firm is in a 35% tax bracket. What is the after taxcost of debt? A. 9.81%B. 10.20%C. 6.37%D. 6.50% Wonder Warp Corp. (WWC) recently reported that is after-tax cost of debt capital was 6.50%. If WWC's average tax rate is 30% what is the yield-to-maturity on WWC's bonds? A. 6.90%B. 8.97%C. 9.30%D. 21.67%AFTER TAX COST OF DEBT=y(1-t) 6.50%=y(1-30%)=9.29% Micro Brew (MB) is considering issuing new common stock. MB currently trades at $32.50 a share and MB's investment bankers estimate that it will cost $2.30 a share to issue new common stock. What is MB's estimated cost of new common shares, if the firm's cost of retained earnings is 12.01%? A. 8.50%B. 12.25%C. 13.02%D. 15.00% Po=32.5, F=2.30 Ke cost of retained earnings=12.01% Net sock Ke = D1/Po+g 12.01%=D1/32.5+0 ==3.9 Kn = D1/P0 + g = F=2.30/32.5=7.07% 1- F

3.9/32.5+0/1-7.07= 12.92 The calculation of the cost of capital depends upon historical costs of funds. FALSE The cost of capital for each source of funds is a cost dependent on current market conditions and expected rates of return. TRUE Kn=(D1/Po +g)/1-F

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version