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%