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Cost of Capital 16

# Cost of Capital 16 - A 10.14 B 9.27 C 9.85 D 8.98 E 9.56 27...

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Old Exam Questions - Cost of Capital Page 16 of 27 Pages The company’s tax rate is 40 percent. The company will meet its equity requirements by issuing new common stock and they anticipate that total flotation costs will be equal to 20 percent of the amount issued. Assume the company accounts for flotation costs by adjusting the cost of capital. Given this information, determine the company’s WACC. A. 7.15% B. 6.87% C. 7.29% D. 7.01% E. 6.73% 26. Assume that a firm’s optimal capital structure consists of 25 percent debt, 8 percent preferred, and 67 percent equity, where the firm will have sufficient retained earnings to meet its equity needs. The firm’s before tax cost of debt is 7 percent and its tax rate is 40 percent. The price of the firm’s common stock is currently \$45 per share, it expects to pay a dividend of \$3.15 next year, and its long-run sustainable growth is 6 percent. Given this information, and assuming that the firm has a weighted average cost of capital (WACC) of 10.548 percent, determine the firm’s cost of preferred stock.
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Unformatted text preview: A. 10.14% B. 9.27% C. 9.85% D. 8.98% E. 9.56% 27. Assume that a firm expects that its common stock dividend will be \$1.90 next year (D 1 ). It also believes that if it sells new shares, the market will be willing to pay \$37.50 per share, but that the firm would only net \$33.00 per share after adjusting for flotation costs. Given this data, and assuming that the firm’s long-run sustainable growth rate is 6 percent, determine the firm’s cost of new equity. A. 11.52% B. 12.00% C. 11.04% D. 11.28% E. 11.76% 28. Assume that a firm’s optimal capital structure consists of \$30,000,000 of debt at a before-tax cost of debt (K D ) of 8 percent, \$10,000,000 of preferred stock at a cost of preferred (K P ) of 8 percent, and \$60,000,000 of stock at a cost of stock (K S ) of 14 percent. Assuming that the firm’s tax rate is 40%, determine the firm’s weighted average cost of capital (WACC). A. 10.34% B. 11.24% C. 10.94%...
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