Cost of Capital 6

# Cost of Capital 6 - this project A B C D E 2 8.3 7.7 8.1...

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Old Exam Questions - Cost of Capital Page 6 of 27 Pages this project? A. 8.3% B. 7.7% C. 8.1% D. 8.5% E. 7.9% 2. Your firm has estimated that it will spend \$10 million on new capital budgeting projects during the coming year. You have been asked to calculate the appropriate cost of capital to be used to analyze these projects and have collected the following information: Your firm’s targeted capital structure consists of 40 percent debt and 60 percent common equity. Your firm expects to add \$4 million to retained earnings over the coming year that can be used to support the \$10 million in new projects. The company has corporate bonds outstanding with an 8 percent annual coupon that are trading at par. New debt can be issued as a private placement (no flotation expense) and will have the same level of risk as the firm’s current debt. The company’s tax rate is 40 percent. The risk-free rate is 4 percent. The market risk premium is 5 percent. The stock’s beta is 1.2. The company expects to pay a dividend on its common stock of \$2.20 per share
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