Chapter 9: The Cost of Capital Critical Thinking Questions: Write your answer in the space provided or on a separate sheet of paper. 1) Promo Pak has compiled the following financial data: Source of Capital Book Value Market Value Cost Long-term debt $10,000,000 $8,500,000 5.0% Preferred stock 1,000,000 1,500,000 14.0 Common stock equity 9,000,000 15,000,000 20.0 $20,000,000 $25,000,000 (a) Calculate the weighted average cost of capital using book value weights. (b) Calculate the weighted average cost of capital using market value weights.
0.7 + 9 = 12.2%
+ 12 = 14.5% 2) Tangshan Mining is considering issuing long-term debt. The debt would have a 30 year maturity and a 12 percent coupon rate and make semiannual coupon payments. In order to sell the issue, the bonds must be underpriced at a discount of 2.5 percent of face value. In addition, the firm would have to pay flotation costs