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(Difficulty Levels: Easy, Easy/Medium, Medium, Medium/Hard, and Hard) PART I New and Revised Carryover Problems and Questions Multiple Choice: Problems Component cost of preferred stock Answer: e EASY 1 . Klieman Companys perpetual preferred stock sells for $90 per share and pays a $7.50 annual dividend per share. If the company were to sell a new preferred issue, it would incur a flotation cost of 5.00% of the price paid by investors. What is the company's cost of preferred stock? a. 7.50% b. 7.79% c. 8.21% d. 8.57% e. 8.77% Component cost of preferred stock Answer: b EASY 2 . A companys perpetual preferred stock currently trades at $80 per share and pays a $6.00 annual dividend per share. If the company were to sell a new preferred issue, it would incur a flotation cost of 4%. What would the cost of that capital be? a. 7.51% b. 7.81% c. 7.99% d. 8.36% e. 8.62% Component cost of retained earnings: CAPM Answer: d EASY 3 . Assume that you are a consultant to Thornton Inc., and you have been provided with the following data: r RF = 5.5%; RP M = 6.0%; and b = 0.8. What is the cost of equity from retained earnings based on the CAPM approach? a. 9.65% b. 9.91% c. 10.08% d. 10.30% e. 10.49% Chapter 10: The Cost of Capital Page 55 CHAPTER 10 THE COST OF CAPITAL Component cost of retained earnings: CAPM Answer: a EASY 4 . Heino Inc. hired you as a consultant to help them estimate their cost of capital. You have been provided with the following data: r RF = 5.0%; RP M = 5.0%; and b = 1.1. Based on the CAPM approach, what is the cost of equity from retained earnings? a. 10.50% b. 10.71% c. 10.88% d. 11.03% e. 11.14% Component cost of retained earnings: DCF, D 1 Answer: c EASY 5 . Assume that you are a consultant to Morton Inc., and you have been provided with the following data: D 1 = $1.00; P = $25.00; and g = 6% (constant). What is the cost of equity from retained earnings based on the DCF approach? a. 9.79% b. 9.86% c. 10.00% d. 10.20% e. 10.33% Component cost of retained earnings: DCF, D 1 Answer: e EASY 6 . Rhino Inc. hired you as a consultant to help them estimate their cost of capital. You have been provided with the following data: D 1 = $1.30; P 0 = $40.00; and g = 7% (constant). Based on the DCF approach, what is the cost of equity from retained earnings? a. 9.66% b. 9.84% c. 9.97% d. 10.08% e. 10.25% Cost of retained earnings: bond-yield-plus-risk premium Answer: e EASY 7 . P. Daves Inc. hired you as a consultant to help them estimate their cost of equity. The yield on the firms bonds is 6.5%, and Daves' investment bankers believe that the cost of equity can be estimated using a risk premium of 4.0%. What is an estimate of Daves' cost of equity from retained earnings?... View Full Document