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A bond has a $1,000 face value and a coupon rate of 6.2% paid annually.
A new issue would have a flotation cost of 12.3% and a market value of $1,135.22.
The bond matures in 15 years. The firm's marginal tax rate is 35%. What is the after-tax cost of debt?
 
3.19%
4.06%
4.91%
6.25%
 
PV = -995.59
FV = 1000
N = 15
PMT = 62
I = 6.25%
 
6.25% x (1-0.35) = 4.06%
   
A new start-up company is attempting to raise capital to grow to a level that is self sustaining.
The company recently received a small business loan of $7 million.
The interest rate on the 8-year loan is 9.4% annually.
The company's marginal tax rate is 34%. Given this information,
the monthly payment on the small business loan is ____________ and the after-tax cost of debt is _____________.
 
$58,441; 7.4%
$104,010; 6.2%
$58,441; 6.2%
$104,010; 7.4%
$75,541; 9.4%
 
PV = 7,000,000
FV = 0
PMT = ($104,009.80)
N = 96
I = 0.78%
WACC = 9.4% (1-0.34) = 6.2%
   
AlterU has the option to issue 15-year bonds at $1,180 with a flotation cost of 7%, tax rate of 34%,
and a coupon rate of 6% (paid annually). What is AlterU firm's cost of debt prior to tax?
(Assume the face value of the bond is $1,000.)

5.06%
4.34%
5.88%
5.24%

PV = -1,097.40
FV = 1,000
N = 15
PMT = 60
I = 5.06%
   
A company is planning to issue several bonds to help finance the purchase of new internal technology equipment.
The 10-year bonds will have face value of $1,000 and an annual coupon rate of 6%.
The company has similar bonds outstanding that are currently priced at 96% of par (or face value).
The estimated flotation costs for the bonds will be $18 per bond. If interest payments are made semiannually and
the company's marginal tax rate is 39%, what is the after-tax cost of debt?

3.39%
4.00%
4.15%
6.81%

FV = -1000
PMT = -60/2 = -30
N = 10x2 = 20
PV = 0.96x1000 = 960 - flotation costs = 960 - 18 = $942

I/Y = 3.405%
Before - Tax Cost of Debt = 3.405 x 2 = 6.81%

After-tax cost of debt = 6.81 x (1-0.39) = 4.154%
   
Another company plans to issue 20-year bonds with a face value of $1,000 and an annual coupon rate of 10%.
The market price of similar bonds is $1,098. Flotation costs are estimated to be 5% for each bond.
If interest payments are made annually, and the company's marginal tax rate is 34%, what is the after-tax cost of debt?

5.89%
6.28%
8.03%
9.51%

FV = -1,000
PMT = -100
N = 20
PV = 1098 x (1- 0.05) = 1043.10
I/Y = 9.511%
After tax = 9.51x (1-0.34)
   
Big Judd's has a beta of 1.1. The market risk premium is expected to 10.5% and the risk free rate is 3.2%.
What is the cost of equity for Big Judd's?

13.51%
14.75%
11.23%
17.41%

Rp = 3.2% + 1.1(10.5) = 14.75%
   
Job Cart Inc. has a preferred stock paying a 7% dividend on a $180 par value.
The company issues new preferred stock, and flotation cost will be 12% of the current price of $195.74.
What is the cost of preferred stock?

7.00%
7.31%
7.95%
6.44%

0.07*180 = 12.60
0.12 * 195.74 = $23.4889
Kps = 12.60 / (195.74 - 23.4889) = 7.31%
   
A company just issued new stock that will pay a dividend of $2.50 per share each year and is expected to grow at a constant rate of
5% per year indefinitely. The price at which the shares were issued was $24.50.
The underwriters have charged $3 per share in flotation costs. Given this information,
what is the cost of equity for this company?

14.55%
15.20%
14.09%
17.21%
16.63%

Kcs= [2.5/(24.5 - 3)] + .05 = 16.63%
   
A company has a beta of 0.8. The expected return on the market is 10%, and the risk-free rate is 3%.
The flotation cost is 8%. Given this information, what is the company's cost of external equity?

9.29%
7.91%
11.88%
10.12%
8.60%

Kcs = [3.0 + 0.8(10 - 3)]*(1 + 0.08) = 9.29%
   
Armadillo Mfg. Co. has a target capital structure of 50% debt and 50% equity.
The firm is planning to invest in a project that will necessitate raising new capital.
New debt will be issued at a before-tax yield of 12%, with a coupon rate of 10%.
The equity will be provided by internally generated funds.
No new outside equity will be issued. If the required rate of return on the firm's stock is 15% and its marginal tax rate is 40%,
what is the firm's cost of capital?

13.5%
11.1%
7.2%
12.5%
11.1%

WACC = 0.5 x 12% x (1 - 0.4) + 0.5 x 15% = 11.1%
   
A company has a beta of 0.8. The expected return on the market is 10%, and the risk-free rate is 3%.
The flotation cost is 8%. Given this information, what is the company's cost of external equity?

10.12%
9.29%
11.88%
8.60%
7.91%

Kcs = [3.0 + 0.8(10 - 3)]*(1 + 0.08) = 9.29%
   
(9) A firm is issuing new debt to finance a capital investment project.
The firm will issue 15,550 new bonds with a $1,000 face value that will mature in 10 years.
The bonds will pay a $35 semiannual coupon, and similar bonds are currently priced at 95% of par.
The associated flotation costs are expected to be $15 per bond. Further, the company has a marginal tax rate of 34%.
Given this information, what is the before-tax cost of debt?

3.98%
7.96%
8.15%
9.54%
6.85%

FV = -1000 PMT = -35 PV = 950 - 15 = 935, N = 10(2) = 20.
Compute I/Y = 3.977(2) = 7.955%
   
A company is planning to use internal equity to help finance the purchase of new internal technology equipment.
You have estimated the company's beta to be 1.5. The market risk premium is 10% and the risk free rate is 3.2%.
If flotation costs have historically been estimated to be 3%, what is the internal cost of equity?
 
17.65%
18.20%
18.75%
23.00%
 
Ri = Rrf + Beta (Rm - Rrf)Kics =
3.2% + 1.5 (10%)
= 3.2% +15% = 18.2%
   
Big Judd's has a beta of 1.1. The market risk premium is expected to 10.5% and the risk free rate is 3.2%.
What is the cost of equity for Big Judd's?
 
13.51%
14.75%
11.23%
17.41%
None of the above
 
Rp = 3.2% + 1.1 (10.5%) = 14.75%
   
Job Cart Inc. has a preferred stock paying a 7% dividend on a $180 par value.
The company issues new preferred stock, and flotation cost will be 12% of the current price of $195.74.
What is the cost of preferred stock?
 
17.65%
7.31%
18.75%
23.00%
 
Kps = Dps / Vps
 
The dividend is equal to 7% of the Par Value of the Stock or .07*180 = $12.60
Flotation costs are .12 * 195.74 = $23.4889
Kps = 12.60/(195.74 - 23.4889) = 7.31%
   
Orange Computers is financed completely by equity and does not have any debt on its balance sheet.
The company is looking to use some of the massive amount of cash on its balance sheet to acquire a small start up firm,
in the Silicon Valley. If the company has a beta of 1.8, expected market returns are 12%, and the risk free rate is 2.8%,
what are Orange Computers cost of equity before flotation costs?
 
7.31%
18.75%
23.00%
19.36%
 
Rp = 2.8% + 1.8 (12% - 2.8%) = 19.36%
   
YIPE Inc. is expecting to pay a dividend of $2.98 in the upcoming year and further anticipates growing the dividend at a constant rate of 5%
per year, indefinitely. If the current share price is $39.87, then what is the cost of equity according to the Gordon Growth Model?
 
12.47%
13.84%
14.10%
14.85%
None of the above
 
Ke = D1/P + g = 2.98/39.87 + 5% = 12.47%
   
Alarm Protect issued new common stock which recently paid a dividend of $1.26 per share.
The par value for the stock is $25.00, and earnings per share (EPS) will grow at 5% per year forever.
Alarm Protect pays out 40% of its earnings in dividends. The current price of the stock is $29.62, but 3% flotation costs are expected.
What is the cost of common stock?
 
4.60%
9.60%
9.39%
9.18%
 
Use the Gordon Growth Model to calculate the cost of capital for this common stock issue:
 
kcs = (D1/V0) + g
Note: D0 = 1.26 so D1 = D0*(1+g) = 1.26*(1.05)
(1.26 X 1.05) / (29.62 X (1 - 0.03)) + 0.05 = 9.60%
   
A firm is issuing new debt to finance some capital investment project.
The firm will issue 20,000 new $1,000 face-value bonds that will mature in 20 years.
The bonds have a coupon rate of 8% and are currently priced at par.
The flotation costs that are associated with this new bond issue are expected to be $10 per bond.
Further, the company has a marginal tax rate of 34%.
Given this information, the before-tax cost of debt is _______________.
 
8.45%
7.45%
8.00%
8.10%
9.9%

FV = -1000, PMT = -80, PV = 1000-10 = 990, N = 20, Compute I/Y = 8.103%.
   
A firm is issuing new debt to finance some capital investment project.
The firm will issue 15,550 new $1,000 face-value bonds that will mature in 10 years.
The bonds will pay a $35 semiannual coupon and similar bonds are currently priced at 95% of par.
The flotation costs that are associated with this new bond issue are expected to be $15 per bond.
Further, the company has a marginal tax rate of 34%.
Given this information, the before-tax cost of debt is _______________.
 
6.85%
3.98%
8.15%
7.96%
9.54%

FV = -1000 PMT = -35 PV = 950-15 = 935, N = 102 = 20; compute I/Y = 3.9772 = 7.955%
  A new start-up company just obtained financing from a small business loan.
The terms of the loan were the following:

Length: 8 years
Annual Interest Rate: 8.3%
Monthly Payments: $10,350.

This loan is the only capital being used by the firm.
If the marginal tax rate is 34%, what is the weighted average cost of capital?
 
10.8%
5.48%
8.3%
11.1 %
7.57%

WACC = C/VKcs + P/VKps + D/VKd(1-t) = D = 1, V = 1 Kd = 8.3%, t = 34% = 18.3*(1-.34) = 5.48%
  A company has a beta of 1.5. The expected return on the market is 15% and the risk free rate is 3.5%.
Given this information, the company has a cost of equity that is ______________.
 
24.66%
19.50%
20.75%
17.25%
21.55%

Kcs = 3.5 + 1.5 (15-3.5) = 20.75%
   
A company just issued new stock that will pay a dividend of $4 per share each year and expected to grow at a constant rate
of 3% per year indefinitely. The price at which the shares were issued was $38.
The underwriters have charged $6 per share in flotation costs.
Given this information, what is the cost of equity for this company?
 
13.5%
15.5%
12.9%
17.1%
18.5%

Kcs= [4/(38-6)] + .03 = .155 or 15.5%
   
A new start-up is attempting to estimate the cost of equity for new shares that the company will soon issue.
The long-term bond yield is expected to be 4%, the equity risk premium is expected to be 5.5%,
the micro-cap risk premium and the start-up risk premium are expected to be 3.5% each.
Flotation costs are also expected to sum to 5%.
Given this information, what is the cost of equity for this new start-up?
 
18.54%
13.65%
17.33%
21.50%
15.41%

Kcs= 4+5.5+3.5+3.5 = 16.5%*1.05 = 17.33%
   
Another Co. has a current share price of $35 and a total of 15 million shares outstanding.
The company currently has debt with a total face value of $880 million.
These outstanding bonds are currently priced to yield 7.9% while quoting at 96.023% of total face value.
The company also has preferred shares outstanding. The current market value of preferred shares is $155 million.
The price of the preferred shares is $46 and the dividend (which is paid in perpetuity) is $5.10 per share.
The company recently paid a dividend to common stock holders of $3.99 and anticipates growing the dividend
at a constant rate of 6% per year indefinitely.
If the corporate tax rate is 34%, what is the WACC of this company?
 
10.24%
10.01%
8.79%
9.55%
12.55%

C = $3515M = $525 M; D = $880 M.96023 = $845 M; P = $155; V = C+D+P = $1,525 M.
Kcs = [(3.99*1.06)/35] + .06 = .1808 or 18.08%
Kp = 5.10/46 = .1109 or 11.09%
Kd = 7.9%
WACC = (525/1525)18.08 + (155/1525)11.09 + (845/1525)7.9(1-.34) = 10.24%
   
Another Co. has both debt and common equity as part of its capital structure.
In particular, the company has 1 million shares of equity outstanding and 30,000, 20-year bonds (that were just issued).
The current share price is $32.
Furthermore, the beta of the firm is 1.5 while the market risk premium is 10.5% and the expected return on the market is 14.5%.
The face value of the bonds is $1,000 and the annual coupon rate is 9%. Their current long-term bonds are selling for $972.
If the corporate tax rate is 40% what is the WACC of the ABC Co?
 
12.05%
14.55%
13.00%
11.48%
15.74%

$32 M, D = $30M*.972 = $29.16M; V = C +D = 32+29.16=61.16M
Kd = (FV = -1000, PMT = -90, PV = 972, N = 20) I/Y = 9.314%
Kcs = 4+1.5(10.5) = 19.75%
WACC = (29.16/61.16)9.314%(1-.40)+(32/61.16)*19.75% = 12.998% = 13%
   
A company is looking to issue new bonds and equity to finance a marketing campaign. In particular, the company will
issue new short-term bonds that have a $1,000 face value, a coupon rate of 8%, and a maturity of 7 years.
Similar bonds are priced at 95% of par (or face value). The company will also issue longer term bonds that have a
face value of $1,000, a coupon rate of 10%, and a maturity of 20 years. Similar longer term bonds are priced at $1,000.
Both of these bonds will pay semi-annual coupons. The company also anticipates financing the marketing campaign
with some internal and external equity. The company has a beta of 1.3. Expected returns on the market are 15% and
the yield on current t-bills is 3%. The company has a marginal tax rate of 34%. After these new security issues,
the total market value of the short term debt will be $175million. The total market value of the long term debt will be $325 million.
The total market value of common equity will be $300 million. Of the $300 million in equity market value, the company will use
$50 million of internal equity to finance the marketing campaign. Therefore, $250 million of new external equity will be issued.
Given this information, what is the WACC for this company?
(Note: Flotation costs will sum to 5%)
 
11.44%
17.41%
10.81%
14.65%
12.54%

D - D(short-term) = 175, D(long-term) = 325, C(internal) = 50, C(external) = 250, V = 175+325+50+250=800
Kd(short term) = (FV = -1000, PMT = -40, PV = 950, N = 14) I/Y = 4.49*2 = 8.98%
Kd(long-term) = (FV = -1000, PMT = -50, PV = 1000, N = 40)I/Y = 5*2 = 10%
Kcs = 3+1.3(15-3) = 18.6%
After accounting for flotation costs:
Kd(short term) = 8.98*1.05 = 9.43%
Kd(long term) = 10*1.05 = 10.5%
Kcs(external) = 18.6*1.05 = 19.53%
WACC = (50/800)18.6 + (250/800)19.53 + (175/800)9.43(1-.34) + (325/800)10.5(1-.34) = 11.44%
   
In the 1999-2000 time period, companies missed out on $_____ because of underpricing.
 
A. 47 billion
B. 67 million
C. 30 billion
D. 67 billion