Chapter 9 The Cost of Capital

55) Crandal Dockworks is undergoing a major expansion. The expansion will be financed by issuing new 15-year, $1,000 par, 9% annual coupon bonds. The market price of the bonds is $1,070 each. Five Rivers flotation expense on the new bonds will be $50 per bond. Crandal's marginal tax rate is 35%. What is the yield to maturity on the newly-issued bonds?

A) 6.95%

B) 7.99%

C) 8.17%

D) 9.82%

56) Crandal Dockworks is undergoing a major expansion. The expansion will be financed by issuing new 15-year, $1,000 par, 9% annual coupon bonds. The market price of the bonds is $1,070 each. Crandal's flotation expense on the new bonds will be $50 per bond. Crandal's marginal tax rate is 35%. What is the pre-tax cost of debt for the newly-issued bonds?

A) 8.76%

B) 8.12%

C) 7.49%

D) 10.25%

57) Tempo Corp. will issue preferred stock to finance a new artillery line. The firm's existing preferred stock pays a dividend of $4.00 per share and is selling for $40 per share. Investment bankers have advised Tempo that flotation costs on the new preferred issue would be 5% of the selling price. Tempo's marginal tax rate is 30%. What is the relevant cost of new preferred stock?

A) 7.00%

B) 7.37%

C) 10.00%

D) 10.53%

E) 15.00%

58) Keystone Corporation will issue new common stock to finance an expansion. The existing common stock just paid a $1.50 dividend, and dividends are expected to grow at a constant rate 8% indefinitely. The stock sells for $45, and flotation expenses of 5% of the selling price will be incurred on new shares. What is the cost of new common stock be for Keystone Corp.?

A) 11.33%

B) 11.51%

C) 11.60%

D) 11.79%

E) 12.53%

59) Grandview Inc. will issue new common stock to finance an expansion. The existing common stock just paid a $1.50 dividend, and dividends are expected to grow at a constant rate 8% indefinitely. The stock sells for $45, and flotation expenses of 5% of the selling price will be incurred on new shares. What is the cost of retained earnings for Grandview?

A) 11.33%

B) 11.51%

C) 11.60%

D) 11.79%

E) 12.53%

60) Which of the following statements is MOST correct?

A) Because the cost of debt is lower than the cost of equity, value-maximizing firms maintain debt ratios of close to 100%.

B) Corporations that are 100% equity financed will have a much lower weighted average cost of capital because the lack of debt lowers their risk of bankruptcy.

C) The source of capital with the lowest after-tax cost is preferred stock, because it is a hybrid security, part debt and part equity.

D) The cost of a particular source of capital is equal to the investor's required rate of return after adjusting for the effects of both flotation costs and corporate taxes.

61) All else equal, an increase in beta results in

A) an increase in the cost of retained earnings.

B) an increase in the cost of newly issued common stock .

C) an increase in the after-tax cost of debt.

D) an increase in the cost of common equity, whether or not the funds come from retained earnings or newly issued common stock.

62) Haroldson Inc. common stock is selling for $22 per share. The last dividend was $1.20, and dividends are expected to grow at a 6% annual rate. Flotation costs on new stock sales are 5% of the selling price. What is the cost of Haroldson's retained earnings?

A) 5.73%

B) 11.45%

C) 11.78%

D) 12.09%

63) Haroldson Inc. common stock is selling for $22 per share. The last dividend was $1.20, and dividends are expected to grow at a 6% annual rate. Flotation costs on new stock sales are 5% of the selling price. What is the cost of Haroldson Inc.'s new common stock?

A) 5.73%

B) 11.45%

C) 11.78%

D) 12.09%

64) New Jet Airlines plans to issue 14-year bonds with a par value of $1,000 that will pay $60 every six months. The bonds have a market price of $1,220. Flotation costs on new debt will be 4% of the selling price. If the firm has a 35% marginal tax bracket, compute the following:

a. Yield to maturity of debt

b. After-tax cost of existing debt

c. After-tax cost of new debt