Cost of Capital 15

# Cost of Capital 15 - of debt(K D of 6 percent 10 preferred...

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Old Exam Questions - Cost of Capital Page 15 of 27 Pages The current stock price (P 0 ) is \$45 per share. If the firm issues new shares of common stock, they will sell for \$44 per share in the market, and the firm will also have to pay flotation expense of 10%. Each of the project’s to be taken on has the same degree of risk as the current projects of the firm. Based on this information, determine the WACC (MCC) for the very first dollar to be raised. A. 8.51% B. 9.99% C. 9.25% D. 8.88% E. 9.62% Determine YTM: 23. Assume that an all equity firm has a return on assets (ROA) of 12.80 percent. And that the firm makes the decision to replace ¼ of its equity with debt that has a before-tax cost of 8 percent (note: this will give a D/E ratio of ( ¼ / ¾ ) = 1/3 ). Assuming that the firm’s tax rate is 40 percent, calculate the firm’s ROE after the debt has been issued and equity has been repurchased. A. 15.10% B. 15.47% C. 14.73% D. 15.84% E. 14.36% 24. Assume that a firm’s optimal capital structure consists of 30% debt at a before-tax cost
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Unformatted text preview: of debt (K D ) of 6 percent, 10% preferred stock at a cost of preferred (K P ) of 8 percent, and 60% stock, and that the firm’s tax rate is 40%. Also assume that the firm’s weighted average cost of capital is equal to 9.572 percent. Based on this information, determine the firm’s cost of common stock (K S ). A. 12.49% B. 11.83% C. 12.16% D. 11.50% E. 12.82% 25. Assume that an analyst has collected the following information about your company: • The company’s capital structure consists entirely of debt and equity and the debt/equity ratio is 2/3. • The yield to maturity on the company’s debt is 6 percent. • The company pays out all of its earnings as dividends (retention rate of zero) and the company’s year-end dividend (D 1 ) is forecasted to be \$0.75 a share. • The company expects that its dividend will grow at a constant rate of 6 percent a year. • The company’s stock price is \$25....
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