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Chapter 10: The Cost of Capital




Chapter 10: The Cost of Capital;1. Midwest Water Works estimates that its WACC is 10.5%. The company is considering the;following capital budgeting projects;Project Size Rate of Return;A $1 million 12.0%;B $1 million 10.2%;C $1 million 11.2%;D $2 million 9.8%;E $2 million 11.0%;F $2 million 10.0%;G $1 million 11.4%;If you assume that each of these projects is just as risky as the firm?s existing assets, and the firm;may accept all the projects or only some of them, which set of projects should be accepted?;a. A, B, C & D b. A, C, E & G c. A, D, E, F & G d. A, B, D, E & G;2. A firm?s capital structure consists of $112,500 in bonds, $187,500 in common stock, and $75,000 in;preferred stock. If the cost of capital is 8%, 10%, and 6% for bonds, common stock, and preferred;stock respectively, what is the weighted average cost of capital (WACC)? (Choose the closest;answer provided).;a. 8.6% b. 8.0% c. 7.4% d. 7.7%;3. A firm is issuing new common stock at a price of $50. Dividends last year were $2.00 and are expected;to grow at an annual rate of 6% forever. Flotation costs will be 5% of the issue price. What is this;firm?s cost of equity? (Choose the closest answer provided).;a. 10.5% b. 10.2% c. 11.2% d. 11.6%;4. A firm is considering a new investment to be financed partially with debt. The firm can sell new;$1,000 par value bonds with a coupon rate of 11% that will mature in 18 years. The firm is in a 30%;tax bracket and flotation costs would be 3%. What is their cost of capital if they decide to issue the;new bonds?;a. 7.3% b. 8.0% c. 9.4% d. 11.4%;5. In question #4 above, what is the investor?s required rate of return?;a. 8.0% b. 11.0% c. 11.4% d. 8.5%. A firm?s cost of capital for newly issued bonds is 8.4% and the investor?s required rate of;return on these bonds is 10%. Specifically, which of the following explains (accounts for) the;difference between these two values?;I. Taxes II. Investor?s Risk Tolerance III. Flotation Costs;a. I only b. II only c. III only d. I and III e. I, II, and III;Use the following information to answer questions #7 thru #9 below;Hudson Corp.?s common stock now sells for $20.00 per share and last year?s dividend was $1.00.;This dividend is expected to grow by 8% per year. If new common stock is issued, Hudson will;pay $1.20 per share in flotation costs.;7. What is the investor?s required rate of return on Hudson?s common stock?;a. 12.8% b. 13.4% c. 13.7% d. 13.0%;8. What is Hudson?s cost of capital if they issue new common stock?;a. 12.8% b. 13.4% c. 13.7% d. 13.0%;9. What is Hudson?s cost of Retained Earnings?;a. 12.8% b. 13.0% c. 13.7% d. 13.4%;10. Sampson Industries can issue perpetual preferred stock at a price of $26.80 per share. The stock would;pay a constant annual dividend of $1.50 a share. What is the investor?s required rate of return on this;preferred stock?;a. 5.3% b. 7.2% c. 6.0% d. 5.6%;Formulas;D;Cost of Preferred Stock: k = ------------------------------------------;(Net Proceeds from Sale of Stock);D1;Cost of Common Stock: k = ----------------------------------------- + g;(Net Proceeds from Sale of Stock);D1;Cost of Retained Earnings: k = ------------------------ + g;Sale Price of Stock;Additional Requirements;Min Pages: 2;Level of Detail: Only answer needed;Other Requirements: Just need it by the due date, just need answers. pretty simple if you are familiar with finance.


Paper#22440 | Written in 18-Jul-2015

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