Cost of Capital Paper 2

1

What return on equity do investors seem to expect for a firm with a $50 share price, an expected dividend of $5.50, a ? of .9, and a constant growth rate of 4.5%?






2

In calculating the component costs of long-term funds, the appropriate cost of retained earnings, ignoring flotation costs, is equal to






3

Which of the following, when considered individually, would generally have the effect of increasing a firm’s cost of capital?
I. The firm reduces its operating leverage.
II. The corporate tax rate is increased.
III. The firm pays off its only outstanding debt.
IV. The Treasury Bond yield increases.






4

Angela Company’s capital structure consists entirely of long-term debt and common equity. The cost of capital for each component is shown below.
Long-term debt 8%
Common equity 15%
Angela pays taxes at a rate of 40%. If Angela’s weighted average cost of capital is 10.41%, what proportion of the company’s capital structure is in the form of long-term debt?






5

Joint Products, Inc., a corporation with a 40% marginal tax rate, plans to issue $1,000,000 of 8% preferred stock in exchange for $1,000,000 of its 8% bonds currently outstanding. The firm’s total liabilities and equity are equal to 10,000,000. The effect of this exchange on the firm’s weighted average cost of capital is likely to be






6

Zeta Corporation’s current-year earnings are $2.00 per share. Using a discounted cash flow model, the controller determines that Zeta’s common stock is worth 14 per share. Assuming a 5% long-term growth rate, Zeta’s required rate of return is which one of the following?






7

A company has a weighted-average cost of capital of 12.8%. If the after-tax cost of debt is 8%, and the weight on debt is 20%, what is the company’s cost of equity? Assume the company has no preferred stock.






8

Ten years ago, Ellison Group issued perpetual preferred shares with a par value of $50 and an annual dividend rate of 6%. Currently, there are no dividends in arrears. Since the issue date, interest rates have risen, and the shares are now selling at $38. The market’s current required rate of return on these shares is






9

The weighted-average cost of capital is equal to the






10

Beck, Inc., issued $100,000, 15-year term bonds with a coupon rate of 8% at par. Interest is paid annually to bondholders. Beck’s effective income tax rate is 35%. Beck used the proceeds to complete the purchase of a supplier whose effective income tax rate is 20%. What is the after-tax cost of debt?






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