10 CHAPTER THE COST OF CAPITAL (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 1 Answer: e
EASY . 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. b. c. d. e. 7.50% 7.79% 8.21% 8.57% 8.77%
Answer: b EASY Component cost of preferred stock 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. b. c. d. e. 7.51% 7.81% 7.99% 8.36% 8.62% Answer:
d EASY Component cost of retained earnings: CAPM 3 . Assume that you are a
consultant to Thornton Inc., and you have been provided with the following data: rRF =
5.5%; RPM = 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 Component cost of retained earnings: CAPM 4 Answer: a
EASY . Heino Inc. hired you as a consultant to help them estimate their cost of capital.
You have been provided with the following data: rRF = 5.0%; RPM = 5.0%; and b = 1.1.
Based on the CAPM approach, what is the cost of equity from retained earnings? a. b. c.
d. e. 10.50% 10.71% 10.88% 11.03% 11.14% Answer: c EASY Component cost of
retained earnings: DCF, D1 5 . Assume that you are a consultant to Morton Inc., and you
have been provided with the following data: D1 = $1.00; P0 = $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, D1 6 Answer: e EASY . Rhino Inc. hired you as a consultant to help them estimate
their cost of capital. You have been provided with the following data: D1 = $1.30; P0 =
$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: bondyieldplusrisk premium 7 Answer: e EASY . 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. b. c. d. e. 9.77% 10.02% 10.19% 10.33% 10.50% Page 56
Chapter 10: The Cost of Capital WACC 8 Answer: d EASY . You were hired as a
consultant to Keys Company, and you were provided with the following data: Target
capital structure: 40% debt, 10% preferred, and 50% common equity. The aftertax cost
of debt is 4.00%, the cost of preferred is 7.50%, and the cost of retained earnings is
11.50%. The firm will not be issuing any new stock. What is the firm s WACC? a. b. c. d.
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 Spring '10
 MCCORMACK
 Finance, Cost Of Capital, Dividend yield, Weighted average cost of capital, a. b. c., b. c. d.

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