Weighted Average Cost of Capital and Common Stock
CHAPTER 9
THE COST OF CAPITAL
(Difficulty: E = Easy, M = Medium, and T = Tough)
Multiple Choice: Problems
Easy:
Cost of common stock Answer: d Diff: E
[i]. Bouchard Company 's stock sells for $20 per share, its last dividend (D0) was $1.00, and its growth rate is a constant 6 percent. What is its cost of common stock, rs?
a. 5.0% b. 5.3% c. 11.0% d. 11.3% e. 11.6%
Cost of common stock Answer: b Diff: E
[ii]. Your company 's stock sells for $50 per share, its last dividend (D0) was $2.00, and its growth rate is a constant 5 percent. What is the cost of common stock, rs?
a. 9.0% b. 9.2% c. 9.6% d. 9.8% e. 10.0%
Cost of common stock Answer: e Diff: E
[iii]. The Global Advertising Company has a marginal tax rate of 40 percent. The last dividend paid by Global was $0.90. Global 's common stock is selling for $8.59 per share, and its expected growth rate in earnings and dividends is 5 percent. What is Global 's cost of common stock?
a. 12.22% b. 17.22% c. 10.33% d. 9.66% e. 16.00%
WACC with Flotation Costs Answer: a Diff: E
[iv]. An analyst has collected the following information regarding Christopher Co.:
• The company’s capital structure is 70 percent equity, 30 percent debt. • The yield to maturity on the company’s bonds is 9 percent. • The company’s year-end dividend is forecasted to be $0.80 a share. • The company expects that its dividend will grow at a constant rate of 9 percent a year. • The company’s stock price is $25. • The company’s tax rate is 40 percent. • The company anticipates that it will need to raise new common stock this year. Its investment bankers anticipate that the total flotation cost will equal 10 percent of the amount issued. Assume the company accounts for flotation costs by adjusting the cost of capital. Given
THE COST OF CAPITAL
(Difficulty: E = Easy, M = Medium, and T = Tough)
Multiple Choice: Problems
Easy:
Cost of common stock Answer: d Diff: E
[i]. Bouchard Company 's stock sells for $20 per share, its last dividend (D0) was $1.00, and its growth rate is a constant 6 percent. What is its cost of common stock, rs?
a. 5.0% b. 5.3% c. 11.0% d. 11.3% e. 11.6%
Cost of common stock Answer: b Diff: E
[ii]. Your company 's stock sells for $50 per share, its last dividend (D0) was $2.00, and its growth rate is a constant 5 percent. What is the cost of common stock, rs?
a. 9.0% b. 9.2% c. 9.6% d. 9.8% e. 10.0%
Cost of common stock Answer: e Diff: E
[iii]. The Global Advertising Company has a marginal tax rate of 40 percent. The last dividend paid by Global was $0.90. Global 's common stock is selling for $8.59 per share, and its expected growth rate in earnings and dividends is 5 percent. What is Global 's cost of common stock?
a. 12.22% b. 17.22% c. 10.33% d. 9.66% e. 16.00%
WACC with Flotation Costs Answer: a Diff: E
[iv]. An analyst has collected the following information regarding Christopher Co.:
• The company’s capital structure is 70 percent equity, 30 percent debt. • The yield to maturity on the company’s bonds is 9 percent. • The company’s year-end dividend is forecasted to be $0.80 a share. • The company expects that its dividend will grow at a constant rate of 9 percent a year. • The company’s stock price is $25. • The company’s tax rate is 40 percent. • The company anticipates that it will need to raise new common stock this year. Its investment bankers anticipate that the total flotation cost will equal 10 percent of the amount issued. Assume the company accounts for flotation costs by adjusting the cost of capital. Given