Cost of Capital - Solutions8

# Cost of Capital - Solutions8 - 9% for up to an additional...

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Old Exam Questions - Cost of Capital - Solutions Page 24 of 42 Pages 9% for up to an additional \$500,000 of new preferred. Equity: 13% for retained earnings. 14% for up to the first \$2,000,000 of new common stock. 15% for up to an additional \$2,000,000 of new common stock. 16% for up to an additional \$2,000,000 of new common stock. Given this information, determine the weighted average cost of capital for the entire \$4,000,000 to be raised for the expansion. A. 9.65% B. 8.85% * C. 9.45% D. 9.05% E. 9.25% RE = (\$350,000 - \$50,000)(1-.35) = \$195,000 After-tax Costs of Debt: 2.4%, 3.0%, and 3.6% There are several different ways to do this. One of them is below. Debt \$500/\$4,000 = 12.500% x 2.40 = 0.30000% Debt \$700/\$4,000 = 17.500% x 3.00 = 0.52500% Preferred \$500/\$4,000 = 12.500% x 8.00 = 1.00000% Preferred \$300/\$4,000 = 7.500% x 9.00 = 0.67500% RE \$195/\$4,000 = 4.875% x 13.00 = 0.63375% Equity \$1,805/\$4,000 = 45.125% x 14.00 = 6.31750% 100.000% 9.45125% WACC = 9.45% 30. Assume that your firm has a weighted average cost of capital of 10.00%, and has a capital structure consisting of 40 percent debt and 60 percent equity. Also assume that the firm’s tax rate is 40 percent and that its cost of stock/equity (ignore flotation costs) is 14 percent. Given this information, determine the firm’s before-tax cost of debt. A. 6.875% B. 6.500% * C. 6.667% D. 6.125% E. 6.333% WACC = 0.10 = (K D )(1-.40)(.40) + (.14)(.60) K D = (0.10 - 0.084) / (1-.40)(.40) = 0.016 / 0.24 = 6.67%

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Old Exam Questions - Cost of Capital - Solutions Page 25 of 42 Pages 31. Assume that your firm has a target capital structure of 30% debt and 70% common
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## This note was uploaded on 07/13/2011 for the course FIN 4414 taught by Professor Staff during the Spring '08 term at University of Florida.

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Cost of Capital - Solutions8 - 9% for up to an additional...

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