Reading 45: Cost of Capital - LOS a ～Q14-15 following, regarding, white, style, black

mayanfang1

Q14. The following data is regarding the Link Company:

• A target debt/equity ratio of 0.5

• Bonds are currently yielding 10%

• Link is a constant growth firm that just paid a dividend of $3.00

• Stock sells for $31.50 per share, and has a growth rate of 5%

• Marginal tax rate is 40%

What is Link's after-tax cost of capital?

A)   10.5%.

B)   12.0%.

C)   12.5%.

Q15. In calculating the weighted average cost of capital (WACC), which of the following statements is least accurate?

A)   Different methods for estimating the cost of common equity might produce different results.

B)   The cost of debt is equal to one minus the marginal tax rate multiplied by the coupon rate on outstanding debt.

C)   The cost of preferred equity capital is the preferred dividend divided by the price of preferred shares.

mayanfang1

答案和详解如下：

Q14. The following data is regarding the Link Company:

• A target debt/equity ratio of 0.5

• Bonds are currently yielding 10%

• Link is a constant growth firm that just paid a dividend of $3.00

• Stock sells for $31.50 per share, and has a growth rate of 5%

• Marginal tax rate is 40%

What is Link's after-tax cost of capital?

A)   10.5%.

B)   12.0%.

C)   12.5%.

Correct answer is B)

Use the revised form of the constant growth model to determine the cost of equity. Use algebra to determine the weights for the target capital structure realizing that debt is 50% of equity. Substitute 0.5E for D in the formula below.

k_s = D₁ ÷ P₀ + growth = (3)(1.05) ÷ (31.50) + 0.05 = 0.15 or 15%

V = debt + equity = 0.5 + 1 = 1.5

WACC = (E ÷ V)(k_s) + (D ÷ V)(k_debt)(1 − t)

WACC = (1 ÷ 1.5)(0.15) + (0.5 ÷ 1.5)(0.10)(1 − 0.4) = 0.1 + 0.02 = 0.12 or 12%

Q15. In calculating the weighted average cost of capital (WACC), which of the following statements is least accurate?

A)   Different methods for estimating the cost of common equity might produce different results.

B)   The cost of debt is equal to one minus the marginal tax rate multiplied by the coupon rate on outstanding debt.

C)   The cost of preferred equity capital is the preferred dividend divided by the price of preferred shares.

Correct answer is B)

After-tax cost of debt = bond yield − tax savings = k_d − k_dt = k_d(1 − t)

fange520

bb

jacky_z

Thanks

connie198226

great

duo1115

see

dullmul

thx

wangyoucao

thanks

dennice

THX

kgbvvsscia

thanks