Cost of Capital 18

Cost of Capital 18 - 31 Assume that your firm has a target...

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Old Exam Questions - Cost of Capital Page 18 of 27 Pages 31. Assume that your firm has a target capital structure of 30% debt and 70% common stock, that the company’s before-tax cost of debt is 6%, and that the marginal tax rate is 35%. Also assume that the current stock price (P 0 ) is $30.00, that the dividend just paid (D 0 ) was $1.80, and that this dividend is expected to grow at a constant rate of 4%. Given this information, and assuming that the firm’s equity needs can be financed from additions to retained earnings, determine the firm’s weighted average cost of capital. A. 8.58% B. 9.11% C. 8.72% D. 8.97% E. 8.34% 32. Assume that your firm can issue new common stock that will pay a dividend (D 1 ) of $2.50 next year, that this dividend will grow at a constant annual growth rate of 4%, and that investors have a required rate of return of 10.25% (you should now be able to determine the current price that investors should be willing to pay for this stock). Also assume that the firm will pay flotation expense of 15 percent to its investment bankers. Using the discounted cash flow (DCF) model, determine the firm’s required rate of return
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