FIN 3302- Your first job after graduation is in the corporate finance department

QUESTION 2

1. Information for 2-6. Your first job after graduation is in the corporate finance department of a Fortune 500 firm. The firm wants to raise $10 billion in funds and it asks you to compute the cost of preferred, the cost of debt, and the weighted average cost of capital, WACC. What is the before-tax cost of debt if it issues 10-year bonds with a face value of $1,000, each bond pays $30 every six months, the flotation cost is $20 per bond, and the public pays par?

   9.10%

   7.19

   5.49

   6.27

   4.90.

1 points

QUESTION 3

1. What is the after-tax cost of debt if the firm is in the 30% tax bracket?

   6.83%

   6.30

   6.11

   4.39

   7.03.

1 points

QUESTION 4

1. What is the cost of preferred stock that will pay a dividend of $2.50, if the flotation cost is $2.00 per share, and if the public pays $35 per share?

   8.16%

   7.58

   9.19

   10.16

   7.14.

1 points

QUESTION 5

1. What is the WACC if the firm raises $2 billion by issuing debt and $8 billion by issuing preferred?

   8.25%

   7.99

   6.94

   7.43

   7.36.

1 points

QUESTION 6

1. Since the after-tax cost of debt is so much lower than that of preferred, the firm should only issue debt

   TRUE

   FALSE.