QUESTION: 23 Topic 1: Part 2 Sec One (1 to 52)

What is the weighted average cost of capital for a firm using 65% common equity with a return of 15%. 25% debt with a return of 6%. 10% preferred stock with a return of 10%.
and a tax rate of 35%?

10.333%
11275%
11325%
12.250%

Answer(s): C

Explanation:

The cost for equity capital is given as 15%, and preferred stock is 10% The before-tax rate for debt is given as 6%. Which translates to an after-tax cost of 3.9% [6% x (1 -- .35)]. The rates are weighted as follows:
15% x .65 = 9.750
10% x .10 = 1.000
3.9% x .25 = .975
11.725%

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QUESTION: 24 Topic 1: Part 2 Sec One (1 to 52)

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What is the after-tax cost of preferred stock that sells for $5 per share and offers a $0.75 dividend when the tax rate is 35%?

5.25%
9.75%
10.50%
15%

Answer(s): D

Explanation:

Because there is no tax shield associated with preferred stock, the after-tax cost is the same as the before-tax cost.Thus, $75 ÷ $5.00 = 15%. Preferred dividends are not deductible for tax purposes.

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QUESTION: 25 Topic 1: Part 2 Sec One (1 to 52)

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What s the weighted average cost of capital for a firm with equal amounts of debt and equity financing, a 15% before-tax company cost of equity capital, a 35% tax rate, and a 12% coupon rate on its debt that is selling at par value?

8.775%
9.60%
11.40%
D 13.50%

Answer(s): C

Explanation:

The 12% debt coupon rate is reduced by the 35% tax shield, resulting in a cost of debt of 78% [12% x (1 -- .35)1 The average of the 15% equity capital and 7.8% debt is 11.4%

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QUESTION: 26 Topic 1: Part 2 Sec One (1 to 52)

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What is the weighted average cost of capital for a firm with 40% debt. 20% preferred stock, and 40% common equity if the respective costs for these components are 8% after- tax, 13% after-tax, and 17% before-tax'? The firm's tax rate is 35%

1022%
10.52%
1148%
1260%

Answer(s): D

Explanation:

All three rates are quoted as after-tax rates since there is no tax shield associated with common equity capital. Thus, simply weight the three rates to determine the weighted average cost.

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QUESTION: 23 Topic 1: Part 2 Sec One (1 to 52)

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QUESTION: 24 Topic 1: Part 2 Sec One (1 to 52)

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QUESTION: 25 Topic 1: Part 2 Sec One (1 to 52)

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QUESTION: 26 Topic 1: Part 2 Sec One (1 to 52)

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