Cost of Capital Flashcards
Which of the following statements regarding the cost of internal common equity is false?
A. It is the rate of return investors require on funds supplied by existing common stockholders.
B. It is the rate of return investors require on funds supplied by existing common stockholders, plus flotation costs.
C. It can be calculated using the CAPM model.
D. It is slightly lower than the cost of equity from new common stock.
B
If a firm has a cost of debt of 10% and an after-tax cost of debt of 6%, what is the firm’s marginal tax rate?
40%
Which of the following statements regarding the cost of equity is true? A. Just like bondholders, stockholders have a contractual agreement with the firm that stipulates the required return on their investment. B. The cost of preferred stock is the cost of issuing new preferred stock. C. The cost of preferred stock represents the minimum return that a firm must earn when using the money supplied by preferred stockholders D. The cost of preferred stock is equal to the expected dividend that a firm must paid preferred stockholders.
D
What is the overall cost of capital of a firm that has a proportion of debt of 30%, an expected return on debt of 7.5% and an expected return on equity of 15%?
12.75%
Consider a firm that has a mixture of 40% debt, 10 % preferred stock and 50% common equity to finance its assets. The after-tax cost of debt is 5%, the cost of preferred stock is 12% and the cost of common equity is 13.5%. What is the firm’s weighted average cost of capital (WACC)?
9.95%
Consider a firm whose debt has a market value of $7 million and whose stock has a market value of $15 million. The cost of equity is 10% and the cost of debt is 5.5%. If the marginal tax rate is 35%, what is the firm’s after-tax WACC?
7.96%
