Question Details

What is the company- weighted average cost of capital 


1.	Billick Brothers is estimating its WACC.  The company has collected the following information:

•	Its capital structure consists of 40 percent debt and 60 percent common equity.
•	The company has 20-year bonds outstanding with a 9 percent annual coupon that are trading at par.
•	The company- tax rate is 40 percent.
•	The risk-free rate is 5.5 percent.
•	The market risk premium is 5 percent.
•	The stock- beta is 1.4.
What is the company- WACC?
a.    9.71%
b.	 9.66%  
c.	 8.31%
d.	11.18%

2.      Flaherty Electric has a capital structure that consists of 70 percent equity and 30 percent debt.  The company- long-term bonds have a before-tax yield to maturity of 8.4 percent.  The company uses the DCF approach to determine the cost of equity.  Flaherty- common stock currently trades at $40.5 per share.  The year-end dividend (D1) is expected to be $2.50 per share, and the dividend is expected to grow forever at a constant rate of 7 percent a year.  The company estimates that it will have to issue new common stock to help fund this year- projects.  The company- tax rate is 40 percent.  What is the company- weighted average cost of capital, WACC?

a.	10.73%  
b.	10.30%
c.	11.31%
d.	 7.48%



3.      Hamilton Company- 8 percent coupon rate, quarterly payment, $1,000 par value bond, which matures in 20 years, currently sells at a price of $686.86.  The company- tax rate is 40 percent.  What is the firm- component cost of debt for purposes of calculating the WACC?

a.	 3.05%
b.	 7.32%   
c.	 7.36%
d.	12.20%


4.	For a typical firm, which of the following is correct?  All rates are after taxes, and assume the firm operates at its target capital structure. Note. d is for debt; e is for equity

a.	rd > re >  WACC.
b.	 re > rd > WACC.
c.	WACC > re > rd.
d.	re >  WACC > rd.  
5.	Which of the following statements is most correct?

a.	The NPV method assumes that cash flows will be reinvested at the cost of capital, while the IRR method assumes reinvestment at the IRR.  
b.	The NPV method assumes that cash flows will be reinvested at the risk-free rate, while the IRR method assumes reinvestment at the IRR.
c.	The NPV method assumes that cash flows will be reinvested at the cost of capital, while the IRR method assumes reinvestment at the risk-free rate.
d.	The NPV method does not consider the inflation premium.




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