If Williams, Inc. needs a total of $1,000,000. the firm's weighted-average cost of capital would be
Answer(s): A
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%.
The before-tax cost of DQZ's planned debt financing, net of flotation costs, in the first year is
Answer(s): B
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%,
Assume that the after-tax cost of debt is 7% and the cost of equity is 12%. Determine the weighted-average cost of capital to DQZ.
The 7% debt cost and the 12% equity cost should be weighted by the proportions of the total investment represented by each source of capital. The total project costs $50 million, of which debt is $15 million, or 30% of the total. Equity capital is the other 70%,. Consequently, the weighted-average cost of capital is 10.5% [(7%)(30%) + (12%)(70%)].
The difference between the required rate of return on a given risky investment and that on a risk less investment with the same expected return is the
The required rate of return on equity capital in the capital asset pricing model is me risk- free rate (determined by government securities) plus the product of the market risk premium times the beta coefficient (beta measures the firm's risk). The market risk premium is the amount above the risk-free rate that will induce investment in the market. The beta coefficient of an individual stock is the correlation between the volatility (price variation) of the stock market and that of the price of the individual stock,
The common stock of the Nicolas Corporation is currently selling at $80 per share. The leadership of the company intends to pay a $4 per share dividend next year With the expectation that the dividend will grow at 5% perpetually, what will the markets required return on investment be for Nicolas common stock'?
Answer(s): D
The dividend growth model estimates the cost of retained earnings using the dividends per share, the expected growth rate, and the market price. The current dividend yield is 5% ($4 + $80) Adding the growth rate of 5% to the yield o15% results in a required return of 10%.
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