QUESTION: 15 Topic 1: Part 2 Sec One (1 to 52)

The cost of funds from retained earnings for Williams, Inc. is

7.0%
7.6%
7.4%
8.1%

Answer(s): A

Explanation:

The three elements required to calculate the cost of equity capital are (1)the dividends per share, (2) the expected growth rate, and (3) the market price of the stock. Because growth is not expected, the calculation is simply to divide the dividend of $7 by the $100 market price of the stock to arrive at a cost of equity capital of 7%. Williams, Inc. is interested in measuring its overall cost of capital and has gathered the following data. Under the terms described as follows, the company can sell unlimited amounts of all instruments. Williams can raise cash by selling $1 .000,8%. 20- year bonds with annual interest payments. In selling the issue, an average premium of $30 per bond would be received, and the firm must pay flotation costs of $30 per bond. The after-tax cost of funds is estimated to be 4.8%. Williams can sell $8 preferred stock at par value, $105 per share. The cost of issuing and selling the preferred stock is expected to be $5 per share. · Williams' common stock is currently selling for $100 per share. The firm expects to pay cash dividends of $7 per share next year, and the dividends are expected to remain constant. The stock will have to be under priced by $3 per share, and flotation costs are expected to amount to $5 per share.
· Williams expects to have available $100,000 of retained earnings in the coming year, once these retained earnings are exhausted, the firm will use new common stock as the form of common stock equity financing.
· Williams' preferred capita4 structure is
Long-term debt 30%
Preferred stock 20%
Common stock 50%

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QUESTION: 16 Topic 1: Part 2 Sec One (1 to 52)

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If Williams, Inc. needs a total of $200,000. the firm's weighted-average cost of capital would be

19.8%
4.8%
6.5%
6.8%

Answer(s): C

Explanation:

Williams' preferred capital structure is 50% common stock. However, $ 100.000 of retained earnings (50% of the required $200,000 of capital) will be used before any common stock is issued. Thus, the weighted-average cost of capital will be determined based on the respective costs of the bonds, preferred stock. and retained earnings. The cost of the bonds is given as 4.8%, the cost of the preferred stock is 8%, and the cost of the retained earnings is 7% ($7 dividend -- $100 market price of the common stock). These three costs are then weighted by the preferred capital structure ratios:
30%x4.8% 1.44%
20% x 8.0% 1.60%
50% x 7.0% 3.50%
Total 6.54%
Rounding to the nearest tenth produces the correct answer of 6.5%. Williams, Inc. is interested in measuring its overall cost of capital and has gathered the following data. Under the terms described as follows, the company can sell unlimited amounts of all instruments.
Williams can raise cash by selling $1,000, 8%. 20- year bonds with annual interest payments. In selling the issue, an average premium of $30 per bond would be received, and the firm must pay flotation costs of $30 per bond. The after-tax cost of funds is estimated to be 4.8%. Williams can sell $8 preferred stock at par value, $105 per share. The cost of issuing and selling the preferred stock is expected to be $5 per share.
Williams' common stock is currently selling for $100 per share. The firm expects to pay cash dividends of $7 per share next year, and the dividends are expected to remain constant. The stock will have to be under priced by $3 per share, and flotation costs are expected to amount to $5 per share. Williams expects to have available $100,000 of retained earnings in the coming year, once these retained earnings are exhausted, the firm will use new common stock as the form of common stock equity financing.
Williams' preferred capital structure is
Long-term debt 30%
Preferred stock 20%
Common stock 50%

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QUESTION: 17 Topic 1: Part 2 Sec One (1 to 52)

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If Williams, Inc. needs a total of $1,000,000. the firm's weighted-average cost of capital would be

6.8%
4.8%
6.5%
27.4%

Answer(s): A

Explanation:

The cost of the bonds is given as 4.8%. The cost of the preferred stock is 8% ($8 dividend + $100). the cost of new common stock is 7.6% ($7 dividend ` $92 proceeds), and the cost of the retained earnings is 7% ($7 dividend ÷ $100 market price). These four costs are then weighted by the preferred capital structure ratios, a process that requires subdividing the common stock portion into retained earnings of $100.000 (10% of capital) and new common stock of $400 000 (40% of capital):
30%x4.8% = 1.44%
20% x 8.0% = 1.60%
40%x7.6% = 3.04%
10% x 7.0% .= .70%
Total 678%
Rounding to the nearest tenth results in the correct answer of 6.8%. DQZ Telecom is considering a project for the coming year that will cost $50 million. DQZ plans to use the following combination of debt and equity to finance the investment. · Issue $15 million of 20-year bonds at price of $101 , with a coupon rate of 8%, and flotation costs of 2% of par
· Use $35 million of funds generated from earnings.
· The equity market is expected to earn 12%. U.S. Treasury bonds are currently yielding 5%. The beta coefficient for DQZ Es estimated to be .60. DOZ is subject to an effective corporate income tax rate of 40%.

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QUESTION: 18 Topic 1: Part 2 Sec One (1 to 52)

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The before-tax cost of DQZ's planned debt financing, net of flotation costs, in the first year is

11.80%
8.08%
10.00%
7.92%

Answer(s): B

Explanation:

Proceeds are $14,850,000 [(1.01 x $15,000,000)-- (.02 x $15,000,000)]. The annual interest is $1.2 million (.08 coupon rate x $15,000,000). Thus, the company is paring $1.2 million annual' for the use of $14,850,000, a rate of 8.08% ($1,200,000 · $14,850,000). DQZ Telecom is considering a project for the coming year that will cost $50 million, DQZ plans to use the following combination of debt and equity to finance the investment. · Issue $15 million of 20-year bonds at a price of $101,with a coupon rate of 8%. and flotation costs of 2% of par.
· Use $35 million of funds generated from earnings. · The eq4jity market is expected to earn 12%. U.S. Treasury bonds are currently yielding 5%. The beta coefficient for DQZ is estimated to be .60. DQZ is subject to an effective corporate income tax rate of 40%,

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QUESTION: 15 Topic 1: Part 2 Sec One (1 to 52)

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QUESTION: 16 Topic 1: Part 2 Sec One (1 to 52)

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QUESTION: 17 Topic 1: Part 2 Sec One (1 to 52)

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QUESTION: 18 Topic 1: Part 2 Sec One (1 to 52)

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