Cost of Capital

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Dr. Sudhakar Raju
FN 6100

QUESTIONS ON CHAPTER 15 (COST OF CAPITAL)

1.) The Wind Rider Company has just issued a dividend of $2.10 per share on its common stock. The company is expected to maintain a constant 7% growth rate on its dividends indefinitely. If the stock sells for $40 a share, what is the company’s cost of equity?

2.) The Ball Corporation’s common stock has a beta of 1.15. If the risk free rate is 5% and the expected return on the market is 12%, what is Ball Corp.’s cost of equity capital?

3.) Stock in Parrothead Industries has a beta of 1.10. The market risk premium is 8% and T-bills are currently yielding 5.50%. Parrothead’s most recent dividend was $2.20 per share and dividends are expected to grow at a 5% annual rate indefinitely. If the stock sells for $32 per share, what is the best estimate of Parrothead’s cost of equity?

4.) Holdup Bank has an issue of preferred stock with a $5 stated dividend that just sold for $92 per share. What is the bank’s cost of preferred stock?

5.) Legend, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 12 years to maturity that is quoted at 107% of face value. The issue makes semiannual payments and has an embedded cost of 10% annually. What is Legend’s pretax cost of debt? If the tax rate is 35%, what is the after tax cost of debt?

6.) Jiminy’s Cricket Farm issued a 30-year, 9% semi-annual bond 8 years ago. The bond currently sells for 105% of its face value. The company’s tax rate is 35%.

a.) What is the pretax cost of debt?
b.) What is the after tax cost of debt?

7.) Mullineaux Corporation has a target capital structure of 50% common stock, 5% preferred stock, and 45% debt. Its cost of equity is 18%, the cost of preferred stock is 6.50%, and the pre-tax cost of debt is 8%. The relevant tax rate is 35%.

a.) What is Mullineaux’s WACC?
b.) The company president has approached you about...
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