So Ks= 0.0635 + (0.1135 - 0.0635)(1.3585) = 0.1314 = 13.14%C. Plug these values into the WACC equation and solve:WACC = [(0.45)(0.09)(1 - 0.35)] + [(0.55)(0.1314)] =0.026325 + 0.07227 = 0.098595 = 9.86%16.A firm assumes that it can issue new, 15-year debt with a maturity value of $1,000 and with an annual coupon rate of 8 percent, but where interest is paid semi-annually. If the firm believes that it can net $781.99 from the sale of each bond after any related flotation costs, and if the firm’s marginal tax rate is 38 percent, then what is the after-cost of debt to this firm?A.6.64%B.6.73%C.6.82%D.6.91%E.7.00%Answer: C 6.82%*N = 30; PV = -781.99; PMT = 40; FV = 1,000; Solve for I/YR = 5.50%Annual Nominal Rate = (2)(5.50%) = 11.0%After-Tax Rate = (11.0%)(1 - .38) = 6.82%17.A firm’s common stock has just paid a dividend (D0) of $1.00 per share. This dividend is expected to grow at a long-run constant growth rate of 15 percent and investors require a 20 percent rate of return on this stock. If the firm issues new shares of stock it assumes that they will sell for the same price that investors are willing to pay today, but the firm will have to pay flotation costs equal to 15 percent of this price. If the firm’s marginal tax rate is 38 percent, then what is the firm’s cost (their required rate of return) for a new issue of common stock?*Old Exam Questions - Cost of Capital - SolutionsPage 16 of 42 Pages
P0= [($1.00)(1.15)] / [.20 - .15] = $23.00Ke= [($1.00)(1.15)] / [($23.00)(1 - .15)] + 0.15 = [$1.15 / $19.55] + 0.15 = 20.88%18.A firm has a market-value balance sheet as indicated below. The firm assumes that it can issue debt at a before-tax cost of 10 percent and has a marginal tax rate of 40 percent. The firm can meet their equity needs through additions to retained earnings and investors currently require a 16 percent rate of return on stock. If the firm issue preferred stock, it will pay a dividend of $15 per year, and although investors will be willing to pay $165 for each share of preferred, the firm will only net $150 per share after accounting for related flotation expenses. Given this data, what is the firm’s weighted average cost of capital (or the marginal costs of capital for the first dollar to be raised)?Balance Sheet at Market Value (In Millions)Current Assets$100.00Long-term Debt$75.00Other Assets$50.00Preferred Stock$15.00Fixed Assets$150.00Equity$210.00Total Assets$300.00Total Liabilities and Equity$300.00*WD= $ 75/$300 = .25WP= $ 15/$300 = .05WE= $210/$300 = .70KD= .10KP= $15/$150 = .10KE= .16WACC = (.25)(.10)(1-.40) + (.05)(.10) + (.70)(.16) = .015 + .005 + .112 = 13.20%19.Your company finances its projects with 50 percent debt, 10 percent preferred stock, and 40 percent common stock.•The company can issue bonds at a yield to maturity of 6.4 percent.•The cost of preferred stock is 7 percent.Old Exam Questions - Cost of Capital - SolutionsPage 17 of 42 Pages
•The company's common stock currently sells for $25 a share.•The company's dividend is currently $2.00 a share (D0 = $2.00), and is expected to grow at a constant rate of 5 percent per year.•Assume that the flotation cost on debt and preferred stock is zero, and no new stock will be issued.•The company’s tax rate is 34 percent.Given this information, determine the company’s weighted average cost of capital. *KS= [($2.00)(1.05) / $25] + .05 = 13.4%WACC = (.064)(1-.34)(.50) + (.07)(.10) + (.134)(.40)WACC =
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