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The component costs of capital are market-determined variables in the sense that they are based on investors' required returns.

A) True
B) False

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To help finance a major expansion,Castro Chemical Company sold a noncallable bond several years ago that now has 20 years to maturity.This bond has a 9.25% annual coupon,paid semiannually,sells at a price of $875,and has a par value of $1,000.If the firm's tax rate is 25%,what is the component cost of debt for use in the WACC calculation? Do not round your intermediate calculations.


A) 6.60%
B) 7.77%
C) 7.30%
D) 6.47%
E) 8.09%

F) B) and E)
G) C) and D)

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Exhibit 10.1 Assume that you have been hired as a consultant by CGT,a major producer of chemicals and plastics,including plastic grocery bags,styrofoam cups,and fertilizers,to estimate the firm's weighted average cost of capital.The balance sheet and some other information are provided below. Assets ā€‹ Exhibit 10.1 Assume that you have been hired as a consultant by CGT,a major producer of chemicals and plastics,including plastic grocery bags,styrofoam cups,and fertilizers,to estimate the firm's weighted average cost of capital.The balance sheet and some other information are provided below. Assets ā€‹ Liabilities and Equity The stock is currently selling for $15.25 per share,and its noncallable $1,000.00 par value,20-year,9.00% bonds with semiannual payments are selling for $930.41.The beta is 1.22,the yield on a 6-month Treasury bill is 3.50%,and the yield on a 20-year Treasury bond is 5.50%.The required return on the stock market is 11.50%,but the market has had an average annual return of 14.50% during the past 5 years.The firm's tax rate is 25%. -Refer to Exhibit 10.1.Which of the following is the best estimate for the weight of debt for use in calculating the WACC? Do not round your intermediate calculations. A) 19.62% B) 20.40% C) 21.22% D) 21.85% E) 22.51% Liabilities and Equity The stock is currently selling for $15.25 per share,and its noncallable $1,000.00 par value,20-year,9.00% bonds with semiannual payments are selling for $930.41.The beta is 1.22,the yield on a 6-month Treasury bill is 3.50%,and the yield on a 20-year Treasury bond is 5.50%.The required return on the stock market is 11.50%,but the market has had an average annual return of 14.50% during the past 5 years.The firm's tax rate is 25%. Exhibit 10.1 Assume that you have been hired as a consultant by CGT,a major producer of chemicals and plastics,including plastic grocery bags,styrofoam cups,and fertilizers,to estimate the firm's weighted average cost of capital.The balance sheet and some other information are provided below. Assets ā€‹ Liabilities and Equity The stock is currently selling for $15.25 per share,and its noncallable $1,000.00 par value,20-year,9.00% bonds with semiannual payments are selling for $930.41.The beta is 1.22,the yield on a 6-month Treasury bill is 3.50%,and the yield on a 20-year Treasury bond is 5.50%.The required return on the stock market is 11.50%,but the market has had an average annual return of 14.50% during the past 5 years.The firm's tax rate is 25%. -Refer to Exhibit 10.1.Which of the following is the best estimate for the weight of debt for use in calculating the WACC? Do not round your intermediate calculations. A) 19.62% B) 20.40% C) 21.22% D) 21.85% E) 22.51% -Refer to Exhibit 10.1.Which of the following is the best estimate for the weight of debt for use in calculating the WACC? Do not round your intermediate calculations.


A) 19.62%
B) 20.40%
C) 21.22%
D) 21.85%
E) 22.51%

F) A) and D)
G) B) and C)

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Daves Inc.recently hired you as a consultant to estimate the company's WACC.You have obtained the following information.(1) The firm's noncallable bonds mature in 20 years,have an 8.00% annual coupon,a par value of $1,000,and a market price of $1,000.00.(2) The company's tax rate is 25%.(3) The risk-free rate is 4.50%,the market risk premium is 5.50%,and the stock's beta is 1.20.(4) The target capital structure consists of 35% debt and the balance is common equity.The firm uses the CAPM to estimate the cost of equity,and it does not expect to issue any new common stock.What is its WACC? Do not round your intermediate calculations.


A) 8.90%
B) 10.32%
C) 11.03%
D) 6.76%
E) 9.32%

F) A) and E)
G) A) and C)

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Exhibit 10.1 Assume that you have been hired as a consultant by CGT,a major producer of chemicals and plastics,including plastic grocery bags,styrofoam cups,and fertilizers,to estimate the firm's weighted average cost of capital.The balance sheet and some other information are provided below. Assets ā€‹ Exhibit 10.1 Assume that you have been hired as a consultant by CGT,a major producer of chemicals and plastics,including plastic grocery bags,styrofoam cups,and fertilizers,to estimate the firm's weighted average cost of capital.The balance sheet and some other information are provided below. Assets ā€‹ Liabilities and Equity The stock is currently selling for $15.25 per share,and its noncallable $1,000.00 par value,20-year,9.00% bonds with semiannual payments are selling for $930.41.The beta is 1.22,the yield on a 6-month Treasury bill is 3.50%,and the yield on a 20-year Treasury bond is 5.50%.The required return on the stock market is 11.50%,but the market has had an average annual return of 14.50% during the past 5 years.The firm's tax rate is 25%. -Refer to Exhibit 10.1.Based on the CAPM,what is the firm's cost of equity? A) 11.41% B) 11.92% C) 12.44% D) 12.82% E) 13.33% Liabilities and Equity The stock is currently selling for $15.25 per share,and its noncallable $1,000.00 par value,20-year,9.00% bonds with semiannual payments are selling for $930.41.The beta is 1.22,the yield on a 6-month Treasury bill is 3.50%,and the yield on a 20-year Treasury bond is 5.50%.The required return on the stock market is 11.50%,but the market has had an average annual return of 14.50% during the past 5 years.The firm's tax rate is 25%. Exhibit 10.1 Assume that you have been hired as a consultant by CGT,a major producer of chemicals and plastics,including plastic grocery bags,styrofoam cups,and fertilizers,to estimate the firm's weighted average cost of capital.The balance sheet and some other information are provided below. Assets ā€‹ Liabilities and Equity The stock is currently selling for $15.25 per share,and its noncallable $1,000.00 par value,20-year,9.00% bonds with semiannual payments are selling for $930.41.The beta is 1.22,the yield on a 6-month Treasury bill is 3.50%,and the yield on a 20-year Treasury bond is 5.50%.The required return on the stock market is 11.50%,but the market has had an average annual return of 14.50% during the past 5 years.The firm's tax rate is 25%. -Refer to Exhibit 10.1.Based on the CAPM,what is the firm's cost of equity? A) 11.41% B) 11.92% C) 12.44% D) 12.82% E) 13.33% -Refer to Exhibit 10.1.Based on the CAPM,what is the firm's cost of equity?


A) 11.41%
B) 11.92%
C) 12.44%
D) 12.82%
E) 13.33%

F) C) and D)
G) A) and E)

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Which of the following statements is CORRECT?


A) When calculating the cost of debt,a company needs to adjust for taxes,because interest payments are deductible by the paying corporation.
B) When calculating the cost of preferred stock,companies must adjust for taxes,because dividends paid on preferred stock are deductible by the paying corporation.
C) Because of tax effects,an increase in the risk-free rate will have a greater effect on the after-tax cost of debt than on the cost of common stock as measured by the CAPM.
D) If a company's beta increases,this will increase the cost of equity used to calculate the WACC,but only if the company does not have enough retained earnings to take care of its equity financing and hence must issue new stock.
E) Higher flotation costs reduce investors' expected returns,and that leads to a reduction in a company's WACC.

F) A) and D)
G) A) and E)

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Which of the following statements is CORRECT?


A) When calculating the cost of preferred stock,a company needs to adjust for taxes,because preferred stock dividends are deductible by the paying corporation.
B) All else equal,an increase in a company's stock price will increase its marginal cost of retained earnings,rs.
C) All else equal,an increase in a company's stock price will increase its marginal cost of new common equity,re.
D) Since the money is readily available,the after-tax cost of retained earnings is usually much lower than the after-tax cost of debt.
E) If a company's tax rate increases but the YTM on its noncallable bonds remains the same,the after-tax cost of its debt will fall.

F) B) and E)
G) B) and C)

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You were hired as a consultant to Quigley Company,whose target capital structure is 35% debt,10% preferred,and 55% common equity.The interest rate on new debt is 6.50%,the yield on the preferred is 6.00%,the cost of retained earnings is 10.50%,and the tax rate is 25%.The firm will not be issuing any new stock.What is Quigley's WACC? Round final answer to two decimal places.Do not round your intermediate calculations.


A) 9.37%
B) 6.73%
C) 6.11%
D) 8.08%
E) 6.97%

F) A) and B)
G) A) and C)

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Bolster Foods' (BF) balance sheet shows a total of $25 million long-term debt with a coupon rate of 8.50%.The yield to maturity on this debt is 8.00%,and the debt has a total current market value of $27 million.The balance sheet also shows that the company has 10 million shares of stock,and the stock has a book value per share of $5.00.The current stock price is $20.00 per share,and stockholders' required rate of return,rs,is 12.25%.The company recently decided that its target capital structure should have 35% debt,with the balance being common equity.The tax rate is 25%.Calculate WACCs based on book,market,and target capital structures,and then find the sum of these three WACCs.Do not round your intermediate calculations.


A) 38.16%
B) 31.08%
C) 18.90%
D) 12.68%
E) 31.73%

F) B) and D)
G) C) and D)

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Firm M's earnings and stock price tend to move up and down with other firms in the S&P 500,while Firm W's earnings and stock price move counter cyclically with M and other S&P companies.Both M and W estimate their costs of equity using the CAPM,they have identical market values,their standard deviations of returns are identical,and they both finance only with common equity.Which of the following statements is CORRECT?


A) M should have the lower WACC because it is like most other companies,and investors like that fact.
B) M and W should have identical WACCs because their risks as measured by the standard deviation of returns are identical.
C) If M and W merge,then the merged firm MW should have a WACC that is a simple average of M's and W's WACCs.
D) Without additional information,it is impossible to predict what the merged firm's WACC would be if M and W merged.
E) Since M and W move counter cyclically to one another,if they merged,the merged firm's WACC would be less than the simple average of the two firms' WACCs.

F) B) and E)
G) C) and E)

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The cost of debt is equal to one minus the marginal tax rate multiplied by the average coupon rate on all outstanding debt.

A) True
B) False

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Bankston Corporation forecasts that if all of its existing financial policies are followed,its proposed capital budget would be so large that it would have to issue new common stock.Since new stock has a higher cost than retained earnings,Bankston would like to avoid issuing new stock.Which of the following actions would REDUCE its need to issue new common stock?


A) Increase the dividend payout ratio for the upcoming year.
B) Increase the percentage of debt in the target capital structure.
C) Increase the proposed capital budget.
D) Reduce the amount of short-term bank debt in order to increase the current ratio.
E) Reduce the percentage of debt in the target capital structure.

F) C) and D)
G) D) and E)

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The CFO of Lenox Industries hired you as a consultant to help estimate its cost of capital.You have obtained the following data: (1) rd = yield on the firm's bonds = 7.00% and the risk premium over its own debt cost = 4.00%.(2) rRF = 5.00%,RPM = 6.00%,and b = 1.65.(3) D1 = $1.20,P0 = $35.00,and g = 8.00% (constant) .You were asked to estimate the cost of equity based on the three most commonly used methods and then to indicate the difference between the highest and lowest of these estimates.What is that difference?


A) 3.90%
B) 4.29%
C) 3.74%
D) 4.60%
E) 4.21%

F) B) and D)
G) A) and B)

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Assume that you are on the financial staff of Vanderheiden Inc. ,and you have collected the following data: The yield on the company's outstanding bonds is 7.75%,its tax rate is 25%,the next expected dividend is $0.65 a share,the dividend is expected to grow at a constant rate of 6.00% a year,the price of the stock is $14.00 per share,the flotation cost for selling new shares is F = 10%,and the target capital structure is 45% debt and 55% common equity.What is the firm's WACC,assuming it must issue new stock to finance its capital budget?


A) 9.96%
B) 7.98%
C) 10.12%
D) 8.75%
E) 8.23%

F) B) and D)
G) A) and B)

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