Cost of Capital 21

# Cost of Capital 21 - is 6 percent, that its tax rate is 40...

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Old Exam Questions - Cost of Capital Page 21 of 27 Pages The company’s tax rate is 40 percent. The risk-free rate is 4 percent. The market risk premium is 8 percent. The stock’s beta is 1.4. The company expects to pay a dividend on its common stock of \$2.76 per share next year (D 1 ). The company’s ROE is 20% and its dividend payout rate is 70%. The current stock price (P 0 ) is \$30 per share. If the firm issues new shares of common stock, they will sell for \$30 per share, but the firm will have to pay flotation expense of 12.5%. Each of the project’s to be taken on has the same degree of risk as the current projects of the firm. Given this information, determine the weighted average (marginal) cost of capital of the very last dollar to be raised. A. 11.062% B. 12.178% C. 11.620% D. 12.736% E. 10.504% 40. Assume that a firm’s current capital structure consists of 1/3 debt and 2/3 common stock (a debt/equity ratio of ½ or 0.50). Assume that the firm’s before-tax cost of debt
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Unformatted text preview: is 6 percent, that its tax rate is 40 percent, and that its cost of common stock is 10 percent. Also assume that the risk-free rate is 4 percent and that the market risk premium is 5 percent (you should now be able to calculate the firms levered beta). Given this information, determine what the firms new weighted average cost of capital will be if it changes to a capital structure of 50 percent debt and 50 percent equity (a debt/equity ratio of 0.50/0.50 or 1.0) A. 8.10% B. 6.90% C. 8.70% D. 7.50% E. 9.30% 41. Assume that a firm takes on a project that requires an initial investment in Year 0 of \$50,000. Also assume that the firm raised the \$50,000 by issuing \$10,000 of debt at a before-tax cost of debt of 8%, and issued \$40,000 of equity at a cost of equity of 15%. Given this information, and assuming that the tax rate is 40%, determine the weighted average cost of capital (WACC) for this project. A. 11.44% B. 11.98% C. 12.96% D. 12.48% E. 10.92%...
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## This note was uploaded on 07/13/2011 for the course FIN 4414 taught by Professor Staff during the Spring '08 term at University of Florida.

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