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Question 1

A firm’s coupon bonds will mature in 12 years and have a coupon rate of 9.50% with semi-annual payments. They currently sell for $1,073.45 per $1,000 bond. If the firm’s average tax rate is 43%, what is the after-tax cost of this debt source?
4.85%

Question 2

A firm will issue $75 million in 20-year coupon bonds with annual payments based on an 11.20% coupon rate. The bonds will be sold at par, but floatation costs are 5.8% of the sales proceeds. If the firm’s average tax rate is 39%, what is the after-tax cost of this debt issue?
7.39%

Question 3

Given its characteristics and current market conditions, a firm believes it can issue preferred stock with a $4.00 annual dividend for $60.00 per share. If the cost of issuing the securities is 7.0% of the proceeds, what is the cost of this source of financing?
7.17%

Question 4

The yields on 3-month, 1-year, and 10-year Treasury securities are 1.20%, 2.65%, and 4.70%, respectively. You believe that the stock market premium over the long-term Treasury yield will be 6.00%. If your firm’s beta has been estimated as 0.90, what is its cost of common equity financing?
10.10%

Question 5

Last year, GHJ, Inc. paid dividends of $2.40 per share. You believe that its dividends will grow at a constant rate of 5.30% indefinitely. If the stock is currently selling for $47.20 per share, what is GHJ’s cost of equity financing?
10.65%

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Question 6

Over the last five years, Lakej, Inc.’s Net Income has averaged $5.27 per share, while its dividends have averaged $1.84 per share. During the same time period, its book value of equity has averaged $36.70 per share. If you believe that Lakej will experience constant growth for the forseeable future, at what rate do you expect that growth to occur? (Hint: ROE = NI/Equity)
9.35%

Question 7

Risit, Inc.’s cost of debt is 7.30%. Its cost of preferred stock is 9.15% and its cost of of common equity is 12.40%. Its target capital structure is 35% debt, 10% preferred stock, and 55% common equity, and its average tax rate is 40%. What is its after-tax weighted-average cost of capital (WACC)?
9.27%

Question 8

Last week, Jig, Inc. issued $30 million in coupon bonds that sold for 102% of par, had annual payments based on an 8.50% coupon rate, and will mature in 10 years. The underwriter was paid 4% of the issue proceeds. If Jig’s average tax rate is 35%, what is the after-tax cost of this source of debt?
5.81%

Question 9

You are analyzing a firm and believe that it has reached a constant growth phase. You estimate that its long term ROE will be 8.60% and that it will retain 40% of its earnings. Last year, the firm paid $1.80 per share in cash dividends. Its stock is selling for $26.70 per share. What is the firm’s cost of equity financing?
10.41%

Question 10

Your firm has bank loans of $35 million that would cost of 7.20% if the money was borrowed today and $50 million in bonds that have a current yield to maturity of 8.10%. The market value of your equity is $115 million and you estimate that its cost is 13.40%. If your firm’s average tax rate is 45%, what is its WACC?
9.51%

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