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(Individual or component costs of capital) Your firm is considering a new investment proposal and would like to calculate its weighted average cost of capital. To help in this, compute the cost of capital for the firm for the following:
A bond that has a $1,000 par value (face value) and a contract or coupon interest rate of 11.9 percent that is paid semiannually. The bond is currently setting for a price of $1,129 and will mature in 10 years. The firm's tax rate is 34 percent. If the firm's bonds are not frequently traded, how would you go about determining a cost of debt for this company?
A new common stock issue that paid a $1.74 dividend last year. The par value of the stock is $16, and the firm's dividends per share have grown at a rate of 8.7 percent per year. This growth rate is expected to continue into the foreseeable future. The price of this stock is now $27.88.
A preferred stock paying a 9.3 percent dividend on a $120 par value. The preferred shares are currently setting for $153.18.
A bond setting to yield 13.9 percent for the purchaser of the bond. The borrowing firm faces a tax rate of 34 percent.
Staal Corporation will pay a $2.54 per share dividend next year. The company pledges to increase its dividend by 3.5 percent per year indefinitely. If you require a return of 11 percent on your investment, how much will you pay for the company’s stoc..
First Simple Bank pays 9.8 percent simple interest on its investment accounts. First Complex Bank pays interest on its accounts compounded annually. Required: What rate should the bank set if it wants to match First Simple Bank over an investment hor..
For this question, assume that each stock has the same variance of return (sigma^2), the correlation between all pairs of stocks is the same (rho) and stocks are equally weighted. Calculate the variance of return of an equally weighted portfolio of 2..
Bayani Bakery's most recent FCF was $50 million; the FCF is expected to grow at a constant rate of 6%. The firm's WACC is 12% and it has 15 million shares of common stock outstanding. What is the value of operations? How many shares will be repurchas..
Consider the following in relation to the (DCF) model: What do positive free cash flows to the firm imply? What do negative free cash flows to the firm imply?
Do you think the default risk premium will likely increase or decrease during the next 6 months? How do you think the yield curve will change during this time? Offer some logic or current reference(s) to support your answers.
A company has a net income of $1500 and a profit margin of 12%. The company's depretiation expense for the year was $500, interest expense was $300, and the average tax rate is 35%. What was the company's taxable income? What were the company's total..
Your firm is contemplating the purchase of a new $620,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $68,000 at the end of that time.
Assume that a portfolio of stocks had an average return of 12% and a standard deviation of 19% over a certain holding period. In which range do the returns fall 99% of the time, assuming the returns are distributed normally?
What is the IRR of the following set of cash flows?
Central Systems, Inc. desires a weighted average cost of capital of 7 percent. The firm has an after-tax cost of debt of 5 percent and a cost of equity of 10 percent. What debt-equity ratio is needed for the firm to achieve its targeted weighted aver..
A credit card company uses the average daily balance method to calculate its finance charges. Find the finance charge for the month of August (31 days) if the average daily balance for August is $417.77. The annual interest rate is 18%. July 31 Balan..
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