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PART I – New and Revised Carryover Problems and Questions
Multiple Choice:
Problems
Component cost of preferred stock
Answer: e
EASY
1
.
Klieman Company’s 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 company’s 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

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
0
= $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 firm’s 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?
a. 9.77%

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