Cost of Capital
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Question 1 of 7
1. Question
Weighted Average Cost of Capital
A company has a target capital structure of 25% debt, 10% preferred stock, and the rest is common equity. Its after-tax cost of debt is 6%, cost of preferred stock is 9%, and cost of equity is 11%. The marginal tax rate of the firm is 40%.
What is the WACC of the company?
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Question 2 of 7
2. Question
Weighted Average Cost of Capital
The marginal cost of capital of a firm is 9% for new capital raised up to $2 million, and 11% for new capital raised beyond $2 million.
A firm is evaluating 3 capital projects as shown:
Project Cost IRR A $2M 15% B $1M 12% C $2M 10% Which of the projects should the firm accept to maximise the value of the firm?
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Question 3 of 7
3. Question
Costs of the Different Sources of Capital
Wendo Corp has a $1000 par 8% annual fixed coupon bond that is currently trading at $1055. The bond has exactly 7 years to maturity. Estimate Wendo’s after-tax cost of debt. The company has a marginal tax rate of 30%.
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Question 4 of 7
4. Question
Costs of the Different Sources of Capital
A company’s preferred stock is trading at $107.80. The fixed dividend each year is $8. Estimate the cost of preferred stock of the company.
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Question 5 of 7
5. Question
Costs of the Different Sources of Capital
Z Corp is Zombieland-based company. The risk-free rate of Zombieland is currently 8%, and the historical returns of the Zombieland stock market is 21%. Z Corp’s stock beta is estimated to be 0.4. Using these information, estimate Z Corp’s cost of equity.
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Question 6 of 7
6. Question
Project Beta
Akins Corp is evaluating entering the furniture retail industry in Germany. The financial manager decides to estimate the project beta using the beta of Woody Corp, a major furniture retailer in Germany. Use the following to estimate the beta of the project for Akins Corp.
Akins Woody D/E ratio 1.5 0.7 Marginal Tax Rate 40% 35% Stock Beta 0.9 0.4 CorrectIncorrect -
Question 7 of 7
7. Question
Flotation Costs
A company is evaluating a $1M project which is expected to return $200,000 each year for the next 8 years. The flotation cost is expected to be 6% of the amount of equity raised. The cost of equity for the company is 12.2%, the after-tax cost of debt is 6.7%, and the target capital structure is 75% equity and 25% debt.
Calculate the NPV of the project, taking into account flotation cost.
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