- The cost of a particular source of capital (debt, preferred stock, common stock) is equal to the investor's required rate of return after adjusting for the effects of both flotation costs (i.e., the commission fee for the issuance of bonds and stocks) and corporate taxes.
2. A stock with constant dividend growth rate is valued as a:
constant growth stock.
fixed coupon rate bond.
zero coupon stock.
3. Which of the following is NOT considered as a capital component for the purpose of calculating the weighted average cost of capital (WACC)?
4. Which one of the following is a logical assumption concerning capital structure weights?
The weights are not constant over time.
A new bond issue will increase the weight of the firm's preferred stock.
The redemption of a bond issue will increase the weight of the firm's debt.
The issuance of additional shares of common stock will not change the weight of the preferred stock.
5. If D represents debt, E represents equity, and P represents preferred, then the capital structure weight of debt is computed as:
6. Suppose your company has an equity beta of 1.0 and the current risk-free rate is 6.0%. If the expected market risk premium is 8.6%, what is your cost of equity capital?
7. A stock sells for $20 per share, its next dividend expected to pay (D1) is $1.00, and its growth rate is a constant 6%. What is its cost of common stock?
8. If a firm's before-tax cost of preferred stock is 10% and the firm has a 35% marginal tax rate, what is the firm's after-tax cost of preferred stock?
None of above is correct.
9. A firm has a target capital structure of 30% debt, 20% preferred stock, and 50% common equity. The company's after-tax cost of debt is 5%, its cost of preferred stock is 10%, and its cost of retained earnings is 12%. What is the company's weighted average cost of capital if retained earnings are used to fund the common equity portion?