Scribd
Upload
84 views2 pages

Topic 7 - Cost of Capital

This document contains 6 questions about calculating the weighted average cost of capital (WACC) for various companies. It provides financial information like capital structures, debt and equity yields, tax rates, and growth rates needed to calculate costs of debt, preferred stock, equity, and WACC. The questions cover calculating WACC based on given capital proportions, as well as explaining why a divisional WACC may be more appropriate than a firm-wide WACC in some cases.

Uploaded by

KS
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
84 views2 pages

Topic 7 - Cost of Capital

This document contains 6 questions about calculating the weighted average cost of capital (WACC) for various companies. It provides financial information like capital structures, debt and equity yields, tax rates, and growth rates needed to calculate costs of debt, preferred stock, equity, and WACC. The questions cover calculating WACC based on given capital proportions, as well as explaining why a divisional WACC may be more appropriate than a firm-wide WACC in some cases.

Uploaded by

KS
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 2

Tutorial

Topic 7: Cost of Capital

Question 1
ABC Company has debt with a yield to maturity of 5%, a cost of equity of 13%, and a cost of preferred
stock of 9%. The market value of its debt, preferred stock, and equity are $10 million, $3 million, and
$15 million respectively, and its tax rate is 40%. What is the firms WACC?

Question 2
Aspen Inc. is planning to issue new debt; to estimate its cost, historical data will be used. Aspens
outstanding debt has an annual coupon interest rate of 10%, pays interest semi-annually, has 20 years
to maturity, and is currently trading at $1,198 per bond. If Aspens tax rate is 35%, what is the after-
tax cost of debt?
In addition, Aspen is planning to issue $100 par value preferred stock with an $8.50 dividend payment.
The firm expects to receive $93 per share. What is the cost of preferred stock?
Aspen is currently selling at $40 per share, and an expected EPS at the end of year of $7.20, a dividend
payout ratio of 50%, and an expected growth rate of 4%. What is Aspens cost of equity?
If Aspens target capital structure is 20% debt, 10% preferred stock, and 70% equity, what is Aspens
opportunity cost of capital?

Question 3
M&A Corporation decides to issue a 10-year new bond to raise money for its expansion project. It is
going to be a $1,000 par value, 6 percent bond for $1,100; the premium is $100. A 3-percent flotation
cost on the face value will be charged by the investment banker who promotes the bond. The marginal
tax rate for M&A is 30%.

(a) Calculate the yield to maturity of the bond.


(b) Calculate the after-tax cost of debt for M&A.
(c) Assuming the cost of common stock for M&A is 20 percent, calculate the WACC for M&A with
proportion of debt and equity of 30% and 70% respectively.

Page 1 of 2
Question 4
ABC Company has the following capital structure, which it considers optimal:

Bonds, 7% (now selling at par) $300,000


Preferred stock, $5.00 240,000
Common stock 360,000

Dividend on common stock are currently $3 per share and are expected to grow at a constant rate of
6%. Market price for common stock is $40, and the preferred stock is selling at $50. Flotation cost on
new issues of common stock is 10%. The interest on bonds is paid annually. The companys tax rate is
40%.

Calculate:

(a) The cost of bonds


(b) The cost of preferred stock
(c) The cost of new common stock
(d) The WACC

Question 5
The following represents the financial information for V Company:

8,500,000 ordinary shares ($5 each) $42,500,000


10,000 debentures 10% (maturity 10 years) $10,000,000
20,000 preference shares 11% ($100 each) $20,000,000

The share price for the company is currently $25 per share. The expected dividend to be paid by the
company is $1.50 per share with a constant growth rate of 6%.

The market price for the preference share is $105 per share. And, the market price for the debentures
is $887.

The marginal tax rate for the company is 30%.

Calculate the WACC.

Question 6
Explain why the use of a divisional WACC is more appropriate than a firm-wide WACC in some
circumstances.

Page 2 of 2

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy