Reading 45: Cost of Capital - LOS a ～ Q6-10

答案和详解如下：

6.A company is planning a $50 million expansion. The expansion is to be financed by selling $20 million in new debt and $30 million in new common stock. The before-tax required return on debt is 9 percent and 14 percent for equity. If the company is in the 40 percent tax bracket, what is the marginal weighted average cost of capital?

A)   10.6%.

B)   9.0%.

C)   10.0%

D)   11.5%.

The correct answer was A)

(.4)(9)(1-.4) + (.6)(14) = 0.106

7.The company has a target capital structure of 40 percent debt and 60 percent equity.

§       $1,000 par value bonds pay 10 percent coupon (semi-annual payments), mature in 20 years, and sell for $849.54.

§       The company stock beta is 1.2.

§       Risk-free rate is 10 percent, and market risk premium is 5 percent.

§       The company's marginal tax rate is 40 percent.

The weighted average cost of capital (WACC) is closest to:

A)   12.5%.

B)   13.0%.

C)   13.5%.

D)   14.0%.

The correct answer was A)

Ks = 0.10 + (0.05)(1.2) = 0.16 or 16%

Kd = Solve for i: N = 40, PMT = 50, FV = 1,000, PV = -849.54, CPT I = 6 x 2 = 12%

WACC = (0.4)(12)(1 - 0.4) + (0.6)(16)= 2.88 + 9.6 = 12.48

8.Assume that a company has equal amounts of debt, common stock, and preferred stock. An increase in the corporate tax rate of a firm will cause its weighted average cost of capital (WACC) to:

A)   rise.

B)   remain the same.

C)   need more information to answer question.

D)   fall.

The correct answer was D)

Recall the WACC equation:

WACC = [w_d x k_d x (1- t)] + (w_ps x k_ps) + (w_ce x k_s)

The increase in the corporate tax rate will result in a lower cost of debt, resulting in a lower WACC for the company.

9.Assume a firm uses a constant WACC to select investment projects rather than adjusting the projects for risk. If so, the firm will tend to:

A)   reject profitable, low-risk projects and reject unprofitable, high-risk projects.

B)   accept profitable, low-risk projects and reject unprofitable, high-risk projects.

C)   accept profitable, low-risk projects and accept unprofitable, high-risk projects.

D)   reject profitable, low-risk projects and accept unprofitable, high-risk projects.

The correct answer was D)

The firm will reject profitable, low-risk projects because it will use a hurdle rate that is too high. The firm should lower the required rate of return for lower risk projects. The firm will accept unprofitable, high-risk projects because the hurdle rate of return used will be too low relative to the risk of the project. The firm should increase the required rate of return for high-risk projects.

10.Which of the following events will reduce a company's weighted average cost of capital?

A)   A reduction in the market risk premium.

B)   A reduction in the company's bond rating.

C)   An increase in the company's beta.

D)   An increase in expected inflation.

The correct answer was A)

An increase in either the company’s beta or the market risk premium will cause the WACC to increase using the CAPM approach. A reduction in the market risk premium will reduce the cost of equity for WACC.