FIN3400 Study Guide - Final Guide: Tax Rate, Preferred Stock, Weighted Arithmetic Mean

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azuredolphin847

19 Apr 2020

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An average of which of the following will give a fairly accurate estimate of what a project"s beta will be? flotation beta pure-play proxies weighted average beta proxy beta. Which of these are fees paid by firms to investment bankers for issuing new securities? seller financing charges flotation costs interest expense user fees. To estimate the before-tax cost of debt, we need to solve for the yield to maturity (ytm) on the firm"s existing debt. To estimate the before-tax cost of debt, we use the average rate on the firm"s existing debt. To estimate the before-tax cost of debt, we use the coupon rate on the firm"s existing debt. To estimate the before-tax cost of debt, we need to solve for the yield to call (ytc) on the firm"s existing debt. Which of the following will directly impact the cost of equity? expected future tax rates stock price expected growth rate in sales profit margins.

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Strange Sights Paranormal Investigators Inc. has a target capital structure that calls for:

40% debt

10% preferred stock

50% common equity

The firms current bonds have a before tax cost of debt of 10% and the firm is in the 40% tax bracket. The firm can sell as much debt as it wishes at this rate. The firms preferred stock currently sells for $90 a share and pays a dividend of $10 per share; however, the firm will pay flotation cost of $10 per share. Strange sights' common stock sells for $40 a share with flotation costs of $6 per share from the sale of new common stock. The firm recently paid a dividend of $2 per share on its common stock, and investors expect the dividend to grow indefinitely at a constant rate of 10% per year. Assume the firm has sufficient retained earnings to fund the equity portion of its capital budget.

1. What is the firms cost of retained earnings? (15.5%)

2. What is the firms cost of newly issued common stock? (16.5%)

3. What is the firms cost of newly issued preferred stock? (12.5%)

4. What is the firms weighted average cost of capital? (11.7%)

The answers are giving in ( ) as a guide, I must show how I got them. Please help!!!!!

peachzebra922

1. Which of the following statements is correct?

A. The WACC measures the before-tax cost of capital.

B. An increase in the firm's marginal corporate tax rate will decrease the weighted average cost of capital.

C. Flotation costs can decrease the weighted average cost of capital.

D. None of these statements is correct.

2. Which of the following statements is correct?

A. A decrease in the firm's marginal corporate tax rate will decrease the weighted average cost of capital.

B. Flotation costs can decrease the weighted average cost of capital.

C. The cost of debt is based on the cost of all liabilities, including accounts payable and accruals.

D. None of these statements are correct.

3. Why do we use market-value weights instead of book-value weights?

	A. Because firms often "window-dress" their financial statements.
	B. Because we are interested in determining what the cost of financing the firm's assets would be given today's market situation and the component costs the firm currently faces, not what the historical prices would have been.
	C. Because it is required in the Sarbanes-Oxley regulations.
	D. None of these answers is correct.

indigocoyote636

Baxter Inc. has a target capital structure of 30% debt, 15% preferred stock, and 55% common equity. The company's after-tax cost of debt is 7%, its cost of preferred stock is 11%, its cost of retained earnings is 15%, and its cost of new common stock is 16%. The company stock has a beta of 1.5 and the company's marginal tax rate is 35%. What is the company's weighted average cost of capital if retained earnings are used to fund the common equity portion?

12%

13.8%

14.45%

11.2%

Crandal Dockworks is undergoing a major expansion. The expansion will be financed by issuing new 15-year, $1,000 par, 9% annual coupon bonds. The market price of the bonds is $1,070 each. Crandal's flotation expense on the new bonds will be $50 per bond. Crandal's marginal tax rate is 35%. What is the pre-tax cost of debt for the newly-issued bonds?

10.25%

8.12%

8.76%

7.49%

plumwallaby100

FIN3400 Study Guide - Final Guide: Tax Rate, Preferred Stock, Weighted Arithmetic Mean

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