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Cost of Capital 8

# Cost of Capital 8 - 6 A firms optimal capital structure c...

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Old Exam Questions - Cost of Capital Page 8 of 27 Pages 6. A firm’s optimal capital structure consists of 40 percent debt, 10 percent preferred stock, and 50 percent common stock. Assume that the firm’s before-tax cost of debt is 8 percent and that its tax rate is 40 percent. Also assume that the firm’s cost of preferred stock is 10 percent and that its cost of common stock is 15 percent. Calculate the firm’s weighted average cost of capital (WACC). A. 10.72% B. 10.42% C. 10.52% D. 10.82% E. 10.62% 7. A firm’s optimal capital structure consists of 35 percent debt, 5 percent preferred stock, and 60 percent common stock. Assume that the firm’s before-tax cost of debt is 6 percent and that its tax rate is 40 percent. Also assume that the firm’s cost of preferred stock is 7 percent and that its cost of common stock is 11 percent. Calculate the firm’s weighted average cost of capital (WACC). A. 7.67% B. 8.52% C. 8.21% D. 7.89% E. 8.93% 8. Your firm has estimated that it will spend \$9 million on new capital budgeting projects during the coming year. You have been asked to calculate the appropriate cost of
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