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Cost of Capital 27

# Cost of Capital 27 - • The company expects that its...

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Old Exam Questions - Cost of Capital Page 27 of 27 Pages price per share) -- you may assume that the company accounts for flotation costs by adjusting the component cost of capital (i.e., it determines a price that it will net and then uses a DCF approach to determine r e ). Given this information, determine what the company’s average cost of capital will be for the entire \$12,000 to be raised. A. 10.33% B. 8.68% C. 9.78% D. 10.88% E. 9.23% 54. Assume that you have collected the following information regarding your company: The company’s capital structure is 60 percent equity, 40 percent debt. The company’s forecasted capital budget for the coming year is \$15,000,000. The before-tax yield to maturity on the company’s bonds is 9 percent and the bonds are selling at par value – you may ignore flotation costs. The company’s dividend next year is forecasted to be \$1.25 a share.
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Unformatted text preview: • The company expects that its dividend will grow at a constant rate of 6 percent a year. • The company’s stock price is \$20. • The company’s tax rate is 40 percent. • The company anticipates that it will add \$4,500,000 to its retained earnings account over the coming year, but that it will also need to raise new common stock over the year. Its investment bankers anticipate that the total flotation cost for new common stock will equal 12.50 percent of the amount issued (or price per share) -- you may assume that the company accounts for flotation costs by adjusting the component cost of capital (i.e., it determines a price that it will net and then uses a DCF approach to determine r e ). Given this information, determine what the company’s average cost of capital will be for the entire \$12,000 to be raised. A. 10.33% B. 8.68% C. 9.78% D. 10.88% E. 9.23%...
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