Q1. If central bank actions caused the risk-free rate to increase, what is the most likely change to cost of debt and equity capital?

A)   Both increase.

B)   Both decrease.

C)   One increase and one decrease.

Q2. Genoa Corp. is estimating its weighted average cost of capital (WACC). They have several pieces of data to consider. The firm pays 40% of its earnings out in dividends. The return on equity (ROE) is 15%. Last year’s earnings were $5.00 per share and the dividend was just paid to shareholders. The current price of shares is $42.00. Genoa's 8% coupon bonds have a yield to maturity of 7.5%. The firm's tax rate is 30%.

The cost of common equity is closest to:

A)   13.76%.

B)   14.19%.

C)   16.14%.

Q3. The after-tax cost of debt is closest to:

A)   7.5%.

B)   5.6%.

C)   5.3%.

Q4. A firm has $3 million in outstanding 10-year bonds, with a fixed rate of 8% (assume annual payments). The bonds trade at a price of $92 per $100 par in the open market. The firm’s marginal tax rate is 35%. What is the after-tax component cost of debt to be used in the weighted average cost of capital (WACC) calculations?

A)   9.26%.

B)   6.02%.

C)   5.40%.

Q5. A company has the following data associated with it:

• A target capital structure of 10% preferred stock, 50% common equity and 40% debt.

• Outstanding 20-year annual pay 6% coupon bonds selling for $894.

• Common stock selling for $45 per share that is expected to grow at 8% and expected to pay a $2 dividend one year from today.

• Their $100 par preferred stock currently sells for $90 and is earning 5%.

• The company's tax rate is 40%.

What is the after tax cost of debt capital and after tax cost of preferred stock capital?

          Debt Capital                   Preferred Stock Capital

A)     4.2%                                  5.6%

B)     4.2%                                  6.3%

C)     4.5%                                  5.6%

答案和详解如下：

Q1. If central bank actions caused the risk-free rate to increase, what is the most likely change to cost of debt and equity capital?

A)   Both increase.

B)   Both decrease.

C)   One increase and one decrease.

Correct answer is A)

An increase in the risk-free rate will cause the cost of equity to increase. It would also cause the cost of debt to increase. In either case, the nominal cost of capital is the risk-free rate plus the appropriate premium for risk.

Q2. Genoa Corp. is estimating its weighted average cost of capital (WACC). They have several pieces of data to consider. The firm pays 40% of its earnings out in dividends. The return on equity (ROE) is 15%. Last year’s earnings were $5.00 per share and the dividend was just paid to shareholders. The current price of shares is $42.00. Genoa's 8% coupon bonds have a yield to maturity of 7.5%. The firm's tax rate is 30%.

The cost of common equity is closest to:

A)   13.76%.

B)   14.19%.

C)   16.14%.

Correct answer is B)

ROE × retention ratio = growth rate.
15% × (1 – 0.40) = 9%

D₀ = $5.00 × 0.40 = $2.00

[$2.00(1.09) / $42.00] + 0.09 = 14.19%

Q3. The after-tax cost of debt is closest to:

A)   7.5%.

B)   5.6%.

C)   5.3%.

Correct answer is C)

7.5 × (1 − 0.3) = 5.25%

Q4. A firm has $3 million in outstanding 10-year bonds, with a fixed rate of 8% (assume annual payments). The bonds trade at a price of $92 per $100 par in the open market. The firm’s marginal tax rate is 35%. What is the after-tax component cost of debt to be used in the weighted average cost of capital (WACC) calculations?

A)   9.26%.

B)   6.02%.

C)   5.40%.

Correct answer is B)

If the bonds are trading at $92 per $100 par, the required yield is 9.26%, and the market value of the issue is $2.76 million.

The equivalent after-tax cost of this financing is: 9.26% (1 – 0.35) = 6.02%.

Q5. A company has the following data associated with it:

• A target capital structure of 10% preferred stock, 50% common equity and 40% debt.

• Outstanding 20-year annual pay 6% coupon bonds selling for $894.

• Common stock selling for $45 per share that is expected to grow at 8% and expected to pay a $2 dividend one year from today.

• Their $100 par preferred stock currently sells for $90 and is earning 5%.

• The company's tax rate is 40%.

What is the after tax cost of debt capital and after tax cost of preferred stock capital?

          Debt Capital                   Preferred Stock Capital

A)     4.2%                                  5.6%

B)     4.2%                                  6.3%

C)     4.5%                                  5.6%

Correct answer is A)

Debt
N = 20; FV = 1,000; PMT = 60; PV = -894; CPT → I = 7%
k_d = (7%)(1 − 0.4) = 4.2%

Preferred Stock
k_ps = D_ps / P
k_ps = 5 / 90 = 5.56%

thx

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