Cost of Capital free essay sample

The Wind Rider Company has just issued a dividend of $2. 10 per share on its common stock. The company is expected to maintain a constant 7% growth rate on its dividends indefinitely. If the stock sells for $40 a share, what is the company’s cost of equity? 2. ) The Ball Corporation’s common stock has a beta of 1. 15. If the risk free rate is 5% and the expected return on the market is 12%, what is Ball Corp. ’s cost of equity capital? 3. Stock in Parrothead Industries has a beta of 1. 10. The market risk premium is 8% and T-bills are currently yielding 5. 50%. Parrothead’s most recent dividend was $2. 20 per share and dividends are expected to grow at a 5% annual rate indefinitely. If the stock sells for $32 per share, what is the best estimate of Parrothead’s cost of equity? 4. ) Holdup Bank has an issue of preferred stock with a $5 stated dividend that just sold for per share. We will write a custom essay sample on Cost of Capital or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page What is the bank’s cost of preferred stock? 5. ) Legend, Inc. , is trying to determine its cost of debt. The firm has a debt issue outstanding with 12 years to maturity that is quoted at 107% of face value. The issue makes semiannual payments and has an embedded cost of 10% annually. What is Legend’s pretax cost of debt? If the tax rate is 35%, what is the after tax cost of debt? 6. ) Jiminy’s Cricket Farm issued a 30-year, 9% semi-annual bond 8 years ago. The bond currently sells for 105% of its face value. The company’s tax rate is 35%. a. ) What is the pretax cost of debt? b. ) What is the after tax cost of debt? 7. Mullineaux Corporation has a target capital structure of 50% common stock, 5% preferred stock, and 45% debt. Its cost of equity is 18%, the cost of preferred stock is 6. 50%, and the pre-tax cost of debt is 8%. The relevant tax rate is 35%. a. ) What is Mullineaux’s WACC? b. ) The company president has approached you about Mullineaux’s capital structure. He wants to know why the company doesn’t use more preferred stock financing s ince it costs less than debt. What would you tell the president? 8 Modigliani Manufacturing has a target debt-equity ratio of . 5. Its cost of equity is 18% and its pre-tax cost of debt is 10%. If the tax rate is 35%, what is Modigliani’s WACC? 9. ) Fama’s Llamas has a weighted average cost of capital of 12. 50%. The company’s cost of equity is 15% and its cost of debt is 8%. The tax rate is 35%. What is Fama’s target debt-equity ratio? 10. ) Sniffles, Inc. has a target debt-equity ratio of . 90. Its WACC is 13% and the tax rate is 35%. a. ) If Sniffles’ cost of equity is 18%, what is its pretax cost of debt? b. ) If instead you know that the after tax cost of debt is 7. 0%, what is the cost of equity? 11. ) Given the following information for Dunhill Power Co. , find the WACC. Assume the company’s tax rate is 35%. a. ) Debt: 3,000, 8% coupon bonds outstanding, $1000 par value, 20 years to maturity, selling for 103% of par. The bonds make semiannual payments. b. ) Common Stock: 90,000 shares outstanding, sel ling for $45 per share; the beta is 1. 20. c. ) Preferred stock: 13,000 shares of 7% preferred stock outstanding, currently selling for $108 per share. d. ) Market: 8% market risk premium and 6% risk-free rate