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Exam 14: Cost of Capital

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Question 111

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A potential problem associated with the use of the dividend growth model to compute the cost of equity is that Everything needed for the model is directly observable except the current dividend.

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Question 112

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Given the following: the risk-free rate is 8% and the market risk premium is 8.5%. Project I should be accepted if the firm's beta is 1.2.

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Question 113

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You are considering a project which requires $687,000 in external financing. The flotation cost of equity is 10 percent and the flotation cost of debt is 6 percent. You wish to maintain a debt-equity Ratio of .55. What is the initial cost of the project including the flotation costs?

Styles Corporation has a current stock price of $24 and has consistently provided a $3 dividend. If the expected stock market return is 15% and the risk free rate is 4%, determine the company's Beta.

The cost of preferred stock is computed the same as:

You are considering a project which requires $136,000 in external financing. The flotation cost of equity is 11 percent and the cost of debt is 4.5 percent. You wish to maintain a debt-equity ratio of45. What is the initial cost of the project including the flotation costs?

The amount raised to finance a project when new securities are issued can be defined as the:

Wild Ducks Unlimited wants to have a weighted average cost of capital of 8.5 percent. The firm has an after-tax cost of debt of 4.6 percent and a cost of equity of 12 percent. What debt-equity ratio is Needed for the firm to achieve the targeted weighted average cost of capital?

The cost of capital for a project should exclude any tax considerations.

The approach to computing the cost of equity financing that utilizes the Treasury bill rate is called the:

The interest rate that should be used when evaluating a capital investment project is sometimes called the appropriate discount rate.

Blackwater Adventures has a bond issue outstanding that matures in sixteen years. The bonds pay interest semi-annually. Currently, the bonds are quoted at 103 percent of face value and carry a 9 Percent coupon. The firm's tax rate is 34 percent. What is the firm's after-tax cost of debt?

The Pulp Company has a 9-year bond outstanding with a 7.5 percent coupon. Coupons are paid semi-annually. The face amount of the bond is $1,000. This bond is currently selling for 96 percent Of its face value. What is the company's pre-tax cost of debt?

By using a firm's WACC to analyze all potential investments, we risk incorrectly accepting some unsuitable projects.

The term used to indicate the percentage of financing derived from equity and the percentage derived from debt is:

The Abco Co. maintains a debt-equity ratio of .70 and has a tax rate of 39 percent. The firm does not issue preferred stock. The cost of equity is 12 percent and the after-tax cost of debt is 5 percent. What is Abco's weighted average cost of capital?

Provide a definition for weighted average cost of capital (WACC).

Since debt is typically a cheaper source of financing than is equity, why don't firms use as close to 100% debt financing as possible?

Which of the following is false?

Hartley, Inc. needs to purchase equipment for its 2,000 drive-ins nationwide. The total cost of the equipment is $2 million. It is estimated that the after-tax cash inflows from the project will be $210,000 annually in perpetuity. Hartley has a market value debt-to-assets ratio of 40%. The firm's Cost of equity is 13%, its pre-tax cost of debt is 8%, and the flotation costs of debt and equity are 2% And 8%, respectively. The tax rate is 34%. Assume the project is of similar risk to the firm's existing Operations. What is the dollar flotation cost for the proposed financing?