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Cost of Capital 12

Cost of Capital 12 - the firm believes that it can net...

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Old Exam Questions - Cost of Capital Page 12 of 27 Pages (2) Over the past four years, the returns on the market and on Z-Mart were as follows: Year Market Z-Mart 2000 12.0% 14.5% 2001 17.2 22.2 2002 - 3.8 - 7.5 2003 20.0 24.0 (3) The current risk-free rate is 6.35 percent, and the expected return on the market is 11.35 percent. The company's tax rate is 35 percent. The company anticipates that its proposed investment projects will be financed with 45 percent debt and 55 percent equity. Determine what the company's estimated weighted average cost of capital (WACC) is. (Hint: you can use regression analysis to find the beta of the firm’s equity.) A. 9.12% B. 10.45% C. 9.86% D. 12.03% E. 11.24% 16. A firm assumes that it can issue new, 15-year debt with a maturity value of $1,000 and with an annual coupon rate of 8 percent, but where interest is paid semi-annually. If
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Unformatted text preview: the firm believes that it can net $781.99 from the sale of each bond after any related flotation costs, and if the firm’s marginal tax rate is 38 percent, then what is the after-cost of debt to this firm? A. 6.64% B. 6.73% C. 6.82% D. 6.91% E. 7.00% 17. A firm’s common stock has just paid a dividend (D ) of $1.00 per share. This dividend is expected to grow at a long-run constant growth rate of 15 percent and investors require a 20 percent rate of return on this stock. If the firm issues new shares of stock it assumes that they will sell for the same price that investors are willing to pay today, but the firm will have to pay flotation costs equal to 15 percent of this price. If the firm’s marginal tax rate is 38 percent, then what is the firm’s cost (their required rate of return) for a new issue of common stock? A. 20.32% B. 20.46% C. 20.60% D. 20.74% E. 20.88%...
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