Question Details

What would be the cost of equity from new common stock 


1.	The amount of retained earnings limit the size of internal equity financing. If the amount of retained earnings is $25m, where do you have a switch from the internal to external equity financing in terms of the size of the total funding when the equity financing accounts for 25% of the total funding and the remaining is from debt?

a.	$150m
b.	$100m
c.	$180m
d.	$130m
e.    $150m 

2.	Long-term debt of Topstone Industries is currently selling for $1,045. Its face value is $1,000. The issue matures in 10 years and pays an annual coupon of 8% of face. What is the before-tax cost of debt for Topstone if the company is in 30% tax bracket? 

a.     6.75%
b.     7.35%
c.     6.85%
d.    7.45%
e.     8.35%

3.	Several years ago the Jakob Company sold a $1,000 par value, noncallable bond that now has 20 years to maturity and a 7.00% annual coupon that is paid semiannually.  The bond currently sells for $925, and the company- tax rate is 40%.  What is the component cost of debt for use in the WACC calculation?

a.	4.28%
b.	4.46%
c.	4.65%
d.	4.83%
e.	5.03%

4.	Weaver Chocolate Co. expects to earn $3.50 per share during the current year, its expected dividend payout ratio is 65%, its expected constant dividend growth rate is 6.0%, and its common stock currently sells for $32.50 per share.  New stock can be sold to the public at the current price, but a flotation cost of 5% would be incurred.  What would be the cost of equity from new common stock ?

a.	12.70%
b.	13.37%
c.	14.04%
d.	14.74%
e.	15.48%

5.	Which of the following statements is CORRECT?

a.	A change in a company- target capital structure cannot affect its WACC.
b.	WACC calculations should be based on the before-tax costs of all the individual capital components.
c.	Flotation costs associated with issuing new common stock normally reduce the WACC.
d.	If a company- tax rate increases, then, all else equal, its weighted average cost of capital will decline.
e.	An increase in the risk-free rate will normally lower the marginal costs of both debt and equity financing.



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