Cost of Capital 13

Cost of Capital 13 - Preferred Stock $15.00 Fixed Assets...

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Old Exam Questions - Cost of Capital Page 13 of 27 Pages 18. A firm has a market-value balance sheet as indicated below. The firm assumes that it can issue debt at a before-tax cost of 10 percent and has a marginal tax rate of 40 percent. The firm can meet their equity needs through additions to retained earnings and investors currently require a 16 percent rate of return on stock. If the firm issue preferred stock, it will pay a dividend of $15 per year, and although investors will be willing to pay $165 for each share of preferred, the firm will only net $150 per share after accounting for related flotation expenses. Given this data, what is the firm’s weighted average cost of capital (or the marginal costs of capital for the first dollar to be raised)? Balance Sheet at Market Value (In Millions) Current Assets $100.00 Long-term Debt $75.00 Other Assets $50.00
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Unformatted text preview: Preferred Stock $15.00 Fixed Assets $150.00 Equity $210.00 Total Assets $300.00 Total Liabilities and Equity $300.00 A. 12.60% B. 12.80% C. 13.00% D. 13.20% E. 13.40% 19. Your company finances its projects with 50 percent debt, 10 percent preferred stock, and 40 percent common stock. The company can issue bonds at a yield to maturity of 6.4 percent. The cost of preferred stock is 7 percent. The company's common stock currently sells for $25 a share. The company's dividend is currently $2.00 a share (D 0 = $2.00), and is expected to grow at a constant rate of 5 percent per year. Assume that the flotation cost on debt and preferred stock is zero, and no new stock will be issued. The companys tax rate is 34 percent. Given this information, determine the companys weighted average cost of capital. A. 8.474% B. 7.863% C. 9.015% D. 8.172% E. 8.759%...
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