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Exam 12: Cost of Capital

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Question 51

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Black Stone Furnaces wants to build a new facility.The cost of capital for this investment is primarily dependent on which one of the following?

A) The firm's overall source of funds
B) Source of the funds used to build the facility
C) Current tax rate
D) The nature of the investment
E) Firm's historical average rate of return

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Question 52

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The common stock of Silent Motors has a beta that is 5 percent greater than the overall market beta.Currently, the market risk premium is 8.25 percent while the U.S.Treasury bill is yielding 2.8 percent.What is the cost of equity for this firm?

A) 11.66 percent
B) 10.86 percent
C) 11.81 percent
D) 11.46 percent
E) 10.75 percent

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Question 53

Multiple Choice

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Pride of Lions has bonds outstanding that carry an annual coupon of 5.75 percent.The bonds mature in 9 years and are currently priced at 98 percent of face value.What is the firm's pretax cost of debt?

Bruceton's is a specialty retailer with multiple brick-and-mortar stores and a cost of capital of 16.4 percent.Specialty Imports is a wholesaler of specialty items and has a cost of capital of 12.6 percent.Both firms are considering opening a new store in downtown Chicago at a cost of $1.1 million.Because this type of store would be trendy, it would have a life of only 8 years and no salvage value.The expected annual net cash flow is $229,000, regardless of which firm opens the store.Which company(ies) , if either, should open the Chicago store?

Mississippi Mud Products would like to issue new equity shares if its cost of equity declines to 9.5 percent.The company pays a constant annual dividend of $4.80 per share.What does the market price of the stock need to be for the firm to issue the new shares?

Trendsetters has a cost of equity of 14.6 percent.The market risk premium is 8.4 percent and the risk-free rate is 3.9 percent.The company is acquiring a competitor, which will increase the company's beta to 1.4.What effect, if any, will the acquisition have on the firm's cost of equity capital?

All else constant, the weighted average cost of capital for a risky, levered firm will decrease if:

All else constant, an increase in a firm's cost of debt:

In an efficient market, the cost of equity for a highly risky firm:

A firm wants to create a WACC of 11.2 percent.The firm's cost of equity is 16.8 percent and its pretax cost of debt is 8.7 percent.The tax rate is 35 percent.What does the debt-equity ratio need to be for the firm to achieve its target WACC?

Which one of the following statements is correct related to the dividend growth model approach to computing the cost of equity?

Rockingham Motors issued a 30-year, 8 percent semiannual bond 3 years ago.The bond currently sells for 103.1 percent of its face value.The company's tax rate is 34 percent.What is the aftertax cost of debt?

A firm has a cost of equity of 13 percent, a cost of preferred of 11 percent, an aftertax cost of debt of 5.2 percent, and a tax rate of 35 percent.Given this, which one of the following will increase the firm's weighted average cost of capital?

The Five and Dime Store has a cost of equity of 14.8 percent, a pretax cost of debt of 6.7 percent, and a tax rate of 34 percent.What is the firm's weighted average cost of capital if the debt-equity ratio is .46?

Mercury Racquetballs just paid an annual dividend of $2.03 on its common stock and increases its dividend by 2.75 percent annually.What is the rate of return on this stock if the current stock price is $49.50 a share?

Which one of the following statements is correct? Assume the pretax cost of debt is less than the cost of equity.

Which one of the following is most apt to cause a wise manager to increase a project's cost of capital? Assume the firm is levered.

KellyAnne Public Relations just paid an annual dividend of $1.27 on its common stock and increases its dividend by 3.4 percent annually.What is the rate of return on this stock if the current stock price is $38.56 a share?

Big Tree Inn has an EBIT of $121,318, a decrease in net working capital of $1,204, interest expense of $5,200, net capital spending of $5,200, and a tax rate of 35 percent.The firm's WACC is 12.6 percent and its growth rate is 2.7 percent.What is the adjusted value of the firm?

Healthy Snacks has a target capital structure of 60 percent common stock, 3 percent preferred stock, and 37 percent debt.Its cost of equity is 16.8 percent, the cost of preferred stock is 11.4 percent, and the pretax cost of debt is 8.3 percent.What is the company's WACC if the applicable tax rate is 34 percent?