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FNAN 301
Test bank problems – cost of capital
1. Last Stand Corp. has 700,000 shares of common equity outstanding that have an expected return of 16% and
a current price of $40 each.
The expected return on the market is 13% and the riskfree rate is 3%.
Last Stand
has issued 50,000 bonds with a face value of $1,000 and a market value of $920 each.
The yield to maturity
on these bonds is 8% and the annual coupon rate is 6%.
If the corporate tax rate is 30%, what is the weighted
average cost of capital for Last Stand Corp?
(Fall 2009, final, question 19)
(Spring 2010, final, question 19)
2. The Green Forest Company has 1,000,000 shares of preferred equity outstanding that have an expected
return of 12% and a current price of $17 each.
Green Forest has 2,000,000 shares of common equity
outstanding that have an expected return of 18% and a current price of $38 each.
The expected return on the
market is 10% and the riskfree rate is 3%.
Green Forest has issued 50,000 bonds with a face value of $1,000
and a market value of $940 each.
The annual coupon rate on these bonds is 7% and their yieldtomaturity is
9%.
If the corporate tax rate is 40%, what is the weightedaverage cost of capital for Green Forest?
(Summer C 2010, final, question 24)
3. The weightedaverage cost of capital for Castle Hotel Company is 9.0 percent.
The firm has equity valued
at $100 million and debt valued at $200 million.
The firm’s debt has an expected return of 9.0 percent and the
corporate tax rate is 30 percent.
The expected return on the market is 14.0 percent and the riskfree rate is 4.0
percent.
a.
What is the expected return on Castle Hotel’s equity?
b. What is the beta for Castle Hotel’s equity?
4. Post Pattern Inc. has 800,000 shares of common equity outstanding that have an expected return of 14.00%
and a current price of $30 each.
Post Pattern has issued 40,000 bonds with a face value of $1,000, a market
value of $925 each, and an annual coupon rate of 8.00%, and that pay annual coupons with the next one due in
1 year.
The bonds mature in 14 years.
If the corporate tax rate is 40%, what is the weightedaverage cost of
capital for Post Pattern Corp?
(Fall 2010, final, question 23)
5. The Foundation Company has 10,000 bonds outstanding with a coupon rate of 8.0 percent, face value of
$1,000, price of $1,500, and yieldtomaturity of 12.0 percent.
The company also has 2,000,000 common
shares outstanding with an expected return of 19.0 percent.
The common stock’s next annual dividend, which
is expected in 1 year, is anticipated to be $3.75 and then to increase annually by 9.0 percent forever.
Lastly,
the company has 1,000,000 shares of preferred stock outstanding that are priced at $10 per share and have an
expected return of 16.0 percent.
The tax rate is 50%.
What is the weighted average cost of capital for the
Foundation Company?
6. The Sunset Cruise Company has 125,000 common shares outstanding that are priced at $45 per share and
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This note was uploaded on 02/03/2011 for the course FINANCE 301 taught by Professor Murray during the Spring '09 term at George Mason.
 Spring '09
 MURRAY
 Cost Of Capital

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