Chapter 9 The Cost of Capital

35) Sentry Manufacturing paid a dividend yesterday of $5 per share (D0= $4). The dividend is expected to grow at a constant rate of 8% per year. The price of Sentry Manufacturing's stock today is $29 per share. If Sentry Manufacturing decides to issue new common stock, flotation costs will equal $2.50 per share. Sentry Manufacturing's marginal tax rate is 35%. Based on the above information, the cost of new common stock is

A) 28.38%.

B) 24.12%.

C) 26.62%.

D) 31.40%.

36) In general, which of the following rankings, from highest to lowest cost, is most accurate?

A) cost of new common stock, cost of preferred stock, cost of debt, cost of retained earnings

B) cost of debt, cost of preferred stock, cost of new common stock, cost of retained earnings

C) cost of new common stock, cost of retained earnings, cost of preferred stock, cost of debt

D) cost of preferred stock, cost of new common stock, cost of retained earnings, cost of debt

37) The risk free rate of return is 2.5% and the market risk premium is 8%. Rogue Transport has a beta of 2.2 and a standard deviation of returns of 28%. Rogue Transport's marginal tax rate is 35%. Analysts expect Rogue Transport's dividends to grow by 6% per year for the foreseeable future. Using the capital asset pricing model, what is Rogue Transport's cost of retained earnings?

A) 16.4%

B) 17.7%

C) 19.6%

D) 20.1%

38) A company has preferred stock with a current market price of $18 per share. The preferred stock pays an annual dividend of 4% based on a par value of $100. Flotation costs associated with the sale of preferred stock equal $1.50 per share. The company's marginal tax rate is 40%. Therefore, the cost of preferred stock is

A) 28.80%.

B) 24.24%.

C) 22.22%.

D) 14.55%.

39) Johnson Production Company paid a dividend yesterday of $3.50 per share. The dividend is expected to grow at a constant rate of 10% per year. The price of KayCee's common stock today is $40 per share. If KayCee decides to issue new common stock, flotation costs will equal $4.00 per share. KayCee's marginal tax rate is 35%. Based on the above information, the cost of retained earnings is

A) 26.41%.

B) 20.09%.

C) 19.63%.

D) 17.55%.

40) Johnson Production Company paid a dividend yesterday of $3.50 per share. The dividend is expected to grow at a constant rate of 10% per year. The price of KayCee's common stock today is $40 per share. If KayCee decides to issue new common stock, flotation costs will equal $4.00 per share. KayCee's marginal tax rate is 35%. Based on the above information, the cost of new common stock is

A) 26.41%.

B) 20.09%.

C) 19.63%.

D) 17.55%.

41) The risk free rate of return is 3% and the expected return on the market portfolio is 14%. Oklahoma Oilco has a beta of 2.0 and a standard deviation of returns of 26%. Oilco's marginal tax rate is 35%. Analysts expect Oilco's net income to grow by 12% per year for the next 5 years. Using the capital asset pricing model, what is Oklahoma Oilco's cost of retained earnings?

A) 18.6%

B) 21.2%

C) 22.8%

D) 25.0%

42) Jiffy Co. expects to pay a dividend of $3.00 per share in one year. The current price of Jiffy common stock is $60 per share. Flotation costs are $3.00 per share when Jiffy issues new stock. What is the cost of internal common equity (retained earnings) if the long-term growth in dividends is projected to be 8 percent indefinitely?

A) 13 percent

B) 14 percent

C) 15 percent

D) 16 percent

43) The average cost associated with each additional dollar of financing for investment projects is

A) the incremental return.

B) the marginal cost of capital.

C) CAPM required return.

D) the component cost of capital.

44) A firm's cost of capital is influenced by

A) the current ratio.

B) par value of common stock.

C) capital structure.

D) net income.