Cost of Capital
Q1: Percy Motors has a target capital structure of 40% debt and 60% equity. The yield to maturity on the company’s outstanding bonds is 9% and the company tax rate is 40%. Percy’s CFO has calculated the company’s WACC as 9.96%. What is the company’s cost of common equity? Q2: Tunney Industries issued preferred stock at a price of $47.50 a share. The issue is expected to pay a constant annual dividend of $3.80 a share. What is the company’s cost of preferred stock, Kp? Q3: Javit & Son’s common stock is currently trading at $30 a share. The stock is expected to pay a dividend of $3.00 a share at the end of the year (D1=$3.00), and dividend is expected to grow at a constant rate of 5% a year. If the company were to issue external equity, it would incur a 10% floatation cost. What are the costs of internal and external equity? Q4: The Patrick company’s cost of common equity is 16%. Its before tax cost of debt is 13% and its marginal tax rate is 40%. The stock sells at book value. Using the following balance sheet, calculate Patrick’s after tax weighted average cost of capital:
Q5: Hook industries has a capital structure that consists solely of debt and common equity. The company can issue debt at 11%. Its stock currently pays a $2 dividend per share (D0 =$2), and the stock’s price is currently $24.75. The company’s dividend is expected to grow at a constant rate of 7% per year; its tax rate is 35%; and the company estimates that its WACC is 13.95%. What percentage of the company’s capital structure consists of debt financing? Q6: Assume that there is an increase in the risk free rat. What impact would this increase have on the cost of debt? What impact would it have on cost of equity? Q7: Sidman products’ stock is currently selling for $60 a share. The firm is expected to earn$5.40 per share this year and to pay a year-end dividend of $3.60. a. If investors require a 9% return, what rate of...
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