Since preferred stock dividends are fixed in the same manner of a coupon bond's
interest payment it is referred to as: - ️️hybrid equity.
A firm has determined its cost of each source of capital and its optimal capital structure
which is comprised of the following sources;
Corona Publishing...
Keen Chapter 11
Since preferred stock dividends are fixed in the same manner of a coupon bond's
interest payment it is referred to as: - ✔️✔️hybrid equity.
A firm has determined its cost of each source of capital and its optimal capital structure
which is comprised of the following sources;
Corona Publishing has debt outstanding with a market value of $10 million. The
company's common stock has a book value of $20 million and a market value of $30
million. What weight for equity should Corona use in its WACC calculation? - ✔️✔️You
should always use market values to determine the total value of the firm and then
compute the weights as a percentage of market value. In this case Corona's total value
is $10 million debt + $30 million in equity = $40 million. Equity represents $30m/$40m,
or 75% of that amount.
Long-term debt = 45%, after-tax cost = 7%
Preferred stock = 15%, after-tax cost = 10%
Common stock equity = 40%, after-tax cost = 14%
To compute the after-tax cost of debt you need to multiply the cost of debt by: - ✔️✔️a
factor equal to one minus the marginal tax rate, or (1 - marginal tax rate).
The appropriate discount rate to use when evaluating capital budgeting projects using
NPV is the: - ✔️✔️WACC.
A firm has a beta of 0.90. If market returns are 12% and the risk-free rate is 4%, the
estimated cost of equity is __________. - ✔️✔️11.2%.
So, the cost of equity = 4% + .90(12% - 4%) = 11.2%
One way to adjust for projects with different levels of risk is to compute the NPV using a
WACC computed with a: - ✔️✔️project-specific beta.
, Which of the following inputs is needed when you use the constant dividend growth
model (CDGM) to estimate the cost of equity? - ✔️✔️Current stock price
Cost of Equity = (Div1/Pe)+g
The __________ is the rate of return a firm must earn on its investment in order to
maintain the market value of its stock. - ✔️✔️cost of capital
The WACC represents the average __________ for the firm. - ✔️✔️cost of financing
A firm has issued 8% preferred stock, which sold for $100 per share par value. The
flotation costs of the stock equaled $3 and the firm's marginal tax rate is 40%. The cost
of the preferred stock is; - ✔️✔️8.25%
Rps = $8/($100 - $3) = $8/$97 = .08247 or 8.25%
Which of the following should be used as the firm's cost of debt? - ✔️✔️The yield to
maturity of the existing debt outstanding.
A tax adjustment must be made in determining the cost of: - ✔️✔️Long-term deb
The effective cost of debt is: - ✔️✔️less than the return paid to debt holders due to tax
benefits of interest paid
The weighted average cost of capital for this firm is; - ✔️✔️WACC = Wd(kd)(1-T) +
Wps(kps) + Wce(kce)
Where;
Wd = weight of debt
kd = cost of debt
T = marginal tax rate
Wps = weight of preferred stock
kps = cost of preferred stock
Wce = weight of common equity
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