Ch_14_S_Key - Cf09Ch14Q1F11 Key 1. A group of individuals...

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1 Cf09Ch14Q1F11 Key 1. A group of individuals got together and purchased all of the outstanding shares of common stock of DL Smith, Inc. What is the return that these individuals require on this investment called? A. dividend yield B. cost of equity C. capital gains yield D. cost of capital E. income return Refer to section 14.2 2. The cost of preferred stock: A. is equal to the dividend yield. B. is equal to the yield to maturity. C. is highly dependent on the dividend growth rate. D. is independent of the stock's price. E. decreases when tax rates increase. Refer to section 14.3 3. Phillips Equipment has 80,000 bonds outstanding that are selling at par. Bonds with similar characteristics are yielding 6.75 percent. The company also has 750,000 shares of 7 percent preferred stock and 2.5 million shares of common stock outstanding. The preferred stock sells for $53 a share. The common stock has a beta of 1.34 and sells for $42 a share. The U.S. Treasury bill is yielding 2.8 percent and the return on the market is 11.2 percent. The corporate tax rate is 38 percent. What is the firm's weighted average cost of capital? A. 10.39 percent B. 10.64 percent C. 11.18 percent D. 11.30 percent E. 11.56 percent R e = 0.028 + 1.34 (0.112 - 0.028) = 0.14056 R p = (0.07 × $100)/$53 = 0.13208 WACC = ($105m/$224.75m) (0.14056) + ($39.75m/$224.75m) (0.13208) + ($80m/$224.75m) (0.0675) (1 - 0.38) = 10.39 percent
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This note was uploaded on 11/29/2011 for the course FINANCE 332 taught by Professor Linney during the Fall '11 term at Guilford Tech.

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Ch_14_S_Key - Cf09Ch14Q1F11 Key 1. A group of individuals...

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