(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 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
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
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: bondyieldplusrisk 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%
This is the end of the preview.
Sign up
to
access the rest of the document.
 Spring '10
 on9
 Corporate Finance, Cost Of Capital, Dividend yield, Weighted average cost of capital, a. b. c., b. c. d.

Click to edit the document details