Cost Of Capital Questions
LECTURE 10
COST OF CAPITAL CLASS QUESTIONS
1. Roland Corporation’s last dividend (D0), which was paid yesterday, was $2.50. The firm has a constant growth of 18.8%. The firm’s beta coefficient is 1.2. The required return on an average stock in the market is 13 percent, and the risk-free rate is 7 percent. Roland’s A-rated bonds are yielding 10 percent, its risk premium is 4% and its current stock price is $30. Which of the following values is the most reasonable estimate of Roland’s cost of retained earnings, ks?
a. 10% b. 12% c. 14% d. 20% e. 26%
2. If a firm can shift its capital structure so as to change its weighted average cost of capital (WACC), which of the following results would be preferred?
a.
The firm should try to decrease the WACC because such an action will increase the value of the firm.
b.
The firm should try to increase the WACC because such an action will increase the value of the firm.
c.
The firm should try to decrease the WACC because such an action will decrease the value of the firm.
d.
The firm should try to increase the WACC because such an action will decrease the value of the firm.
e.
The firm should not try to change the WACC because changing the WACC will not change the value of the firm.
3. The marginal cost of capital __________ as more capital is raised during a given period.
a.
does not change
b.
decreases
c.
increases
d.
changes in an unpredictable way
e.
approaches zero
4. Diggin Tools just issued new preferred stock, which sold for $85 in the stock markets. Holders of the stock will receive an annual dividend equal to $9.35. The flotation costs associated with the new issue were 6 percent and Diggin's marginal tax rate is 30 percent. What is Diggins cost of preferred stock, kps?
a.
11.0%
b.
7.7%
c.
8.2%
d.
11.7%
e.
10.3%
Rollins Corporation
Rollins Corporation is constructing its MCC schedule. Its target capital structure is 20 percent debt, 20 percent preferred stock, and 60 percent common equity. The before-tax
COST OF CAPITAL CLASS QUESTIONS
1. Roland Corporation’s last dividend (D0), which was paid yesterday, was $2.50. The firm has a constant growth of 18.8%. The firm’s beta coefficient is 1.2. The required return on an average stock in the market is 13 percent, and the risk-free rate is 7 percent. Roland’s A-rated bonds are yielding 10 percent, its risk premium is 4% and its current stock price is $30. Which of the following values is the most reasonable estimate of Roland’s cost of retained earnings, ks?
a. 10% b. 12% c. 14% d. 20% e. 26%
2. If a firm can shift its capital structure so as to change its weighted average cost of capital (WACC), which of the following results would be preferred?
a.
The firm should try to decrease the WACC because such an action will increase the value of the firm.
b.
The firm should try to increase the WACC because such an action will increase the value of the firm.
c.
The firm should try to decrease the WACC because such an action will decrease the value of the firm.
d.
The firm should try to increase the WACC because such an action will decrease the value of the firm.
e.
The firm should not try to change the WACC because changing the WACC will not change the value of the firm.
3. The marginal cost of capital __________ as more capital is raised during a given period.
a.
does not change
b.
decreases
c.
increases
d.
changes in an unpredictable way
e.
approaches zero
4. Diggin Tools just issued new preferred stock, which sold for $85 in the stock markets. Holders of the stock will receive an annual dividend equal to $9.35. The flotation costs associated with the new issue were 6 percent and Diggin's marginal tax rate is 30 percent. What is Diggins cost of preferred stock, kps?
a.
11.0%
b.
7.7%
c.
8.2%
d.
11.7%
e.
10.3%
Rollins Corporation
Rollins Corporation is constructing its MCC schedule. Its target capital structure is 20 percent debt, 20 percent preferred stock, and 60 percent common equity. The before-tax