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Free CMA Exam Braindumps (page: 178)

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Without prejudice to your answers from any other questions, assume that the after-tax cost of debt financing is 10%, the cost of retained earnings is 14%, and the cost of new common stock is 16%. If capital expansion needs to be $7 million for the coming year, what is the after-tax weighted-average cost of capital to FLF Corporation?

  1. 11 14%
  2. 1274%
  3. 13.6%
  4. 16%

Answer(s): B

Explanation:

To maintain a capital structure of 40% debt and 60% equity, the $7 million total must consist of $2.8 million of debt and $4.2 million of equity. The equity will consist of $3 million of retained earnings and $1.2 million of new stock. The weighted-average cost of the three sources of new capital is determined as follows:
$3,000000 + $7000,000 x 14% = 6.00%
$1,200,000 $7,000,000 x 16% = 214%
$2,800,000 + $7,000,000 x 10% = 4.00%
12.74%
The FLF Corporation is preparing to evaluate capital expenditure proposals for the coming year. Because the firm employs discounted cash flow methods, the cost of capital for the firm must be estimated. The following information for FLF Corporation is provided:



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Without prejudice to your answers from any other questions, assume that the after-tax cost of debt financing is 10%. the cost of retained earnings is 14%. and the cost of new common stock is 16%. What is the marginal cost of capital to - FLF Corporation for any projected capital expansion in excess of $7 million?

  1. 10%
  2. 12.74%
  3. 136%
  4. 16%

Answer(s): C

Explanation:

For this calculation, the weighted-average cost of capital is based on the 16% cost of new common stock and the 10% cost of debt, Retained earnings will not be considered because the amount available has been exhausted. Thus, the weighted average of any additional capital required will be 13.6% [(60% x 16% cost of new equity) + (40% x 10% cost of new debt].



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Global Company Press has $150 par value preferred stock with a market price of $120 a share, The organization pays a $15 per share annual dividend. Global's current marginal tax rate is 40%. Looking to the future, the company anticipates maintaining its current capital structure. What is the component cost of preferred stock to Global?

  1. 4
  2. 5%
  3. 10%
  4. 125%

Answer(s): D

Explanation:

The cost of preferred stock is the preferred dividend divided by the price. No tax adjustment is necessary because dividends are not deductible. If the market price is $120 when the dividend is $15, the cost of preferred capital is 12.5% ($15+ $120). Williams, Inc. is interested in measuring its overall cost of capital and has gathered the following dat
A. 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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The cost of funds from the sale of common stock for Williams. Inc. is

  1. 7.0%
  2. 7.6%
  3. 7,4%
  4. 8.1%

Answer(s): B

Explanation:

According to the Gordon growth model, 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. If flotation costs are incurred when issuing new stock, they are deducted from the market price to arrive at the amount of capital the corporation will actually receive. According, the $100 selling price is reduced by the $3 discount and the $5 flotation costs to arrive at the $92 to be received for the stock. Because the dividend is not expected to increase in future years, no growth factor is included in the calculation Thus, the cost of the common stock is 7.6% ($7 dividend + $92). 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 kinds 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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