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CH 9: Cost of Capital
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The capital structure of Athletic Clothing Corp. is 70% equity and 30% debt. We could say this company is ___________________.
levered
Corona Publishing has debt outstanding with a market value of $10 million. The company's common stock has a book value of $30 million. What weight for equity should Corona use in its WACC calculation?
75%
The firm's optimal mix of debt and equity is called its:
target capital structure
When we use the WACC as the discount rate in capital budgeting, we are assuming:
the firm will maintain a constant debt-to-equity ratio.
The specific cost of each source of long-term financing is based on ___________________ costs.
after-tax and current
The WACC represents the average ____________________ for the firm.
cost of financing
The cost of retained earnings is equal to:
the cost of common equity
The stock of Canadian Ski Wear is currently trading at $45 a share and the equity beta of the company is estimated to be 1.3. The company is expected to pay a dividend of $1.50 a share next year, and this dividend is expected to grow at a rate of 4% per year. The rate on the 10-year U.S. Treasury bond is 4% and you estimate the market risk premium to be 5%. Using the CAPM, what is the company's cost of equity?
7.3%
The cost of common stock equity may be estimated by using the ________________.
CAPM
The debt issued by Coastal Construction has a coupon rate of 5% and a yield to maturity of 6.2%. The company is in the 25% tax bracket. Coastal Construction's effective cost of debt is:
4.65%
A firms has determined its cost of each source of capital and its optimal capital structure which is comprised of the following sources:
Long-term debt = 45%, after-tax costs = 7%
Preferred stock = 15%, after-tax cost = 10%
Common stock equity = 40%, after-tax cost = %14
The weighted average cost of capital for this firm is:
10.25%
The effective cost of debt is:
less than the return paid to debt holders due to tax benefits of interest paid.
To use the CAPM to estimate the cost of equity you need to know the:
firm's equity beta
A firm has issued 8% preferred stock, which sold for $100 per share par value. The flotation costs of the stock equaled $3 and the firm's marginal tax rate is 40%. The cost of the preferred stock is;
8.25%
Net debt equals total debt outstanding minus:
any cash balances
A tax adjustment must be made in determining the cost of:
long-term debt
The cost of retained earnings is equivalent to the cost of __________________.
common stock
Which of the following inputs is needed when you use the constant dividend growth model (CDGM) to estimate the cost of equity?
Current stock price
A firm has a beta of 0.90. IF market returns are 12% and the risk-free rate is 4%, he estimated cost of equity is ___________________.
11.2%
The ______________________ is the rate of return a firm must earn on its investment in order to maintain the market value of its stock.
cost of capital
The cost of new preferred stock in the WACC is computed as the preferred dividend divided by the ___________________.
net proceeds from the sale of the preferred.
The approximate before-tax cost of debt for a 20-year, 9%, $1,000 par value bond selling for $950 is __________.
9.57%
Which of the following should be used as the firm's cost of debt?
The yield to maturity of the existing debt outstanding.
The cost of debt used in the WACC is adjusted lower __________.
since there is a tax shield associated with paying interest
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