R&B issues 2 million shares of $16 cumulative preferred stock at a price of $41 per share. Issue costs are $2 per share. What is the cost of the preferred stock? Round your answer to the nearest whole %
The weighted average cost of capital (WACC) should be used for evaluating
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A. |
Projects which are similar to the firm s usual projects (same risk) |
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B. |
All projects (regardless of risk) |
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C. |
Projects which are very different from the firm s usual projects (safer or riskier) |
DPL estimates that the yield on their debt is 8%. The equity has a beta of .875. The risk-free return is 5% and the market risk premium is 10%. What is the weighted average cost of capital (WACC) for the firm if they have 19M in debt and 31M in equity? Assume the tax rate is 40%.
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A. |
11.57% |
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B. |
9.74% |
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C. |
7.64% |
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D. |
10.35% |
Conglomo Inc. has a cost of capital of 17%. This is based on a risk-free rate of 4%, a market risk premium of 10% and the firm’s average beta of 1.3. This is a breakdown of the firm’s divisions:
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1/3 is Automotive Retailer |
Beta = 2.0 |
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1/3 is Computer Manufacturer |
Beta = 1.3 |
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1/3 is Electric Utility |
Beta = 0.6 |
When evaluating a new electrical utility investment, what required return should Conglomo use?
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A. |
24% |
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B. |
17% |
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C. |
10% |
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D. |
14% |
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Wiley Wilds has 1200 bonds outstanding that are selling for $990 each. The firm also has 2500 shares of preferred stock at a price of $28 per share. The common stock has a price of $37 per share with 28,000 shares outstanding. Find the weight of the common stock that you would use in the weighted average cost of capital (WACC).
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A. |
45% |
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B. |
50% |
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C. |
43% |
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D. |
52% |
A firm has an asset beta of 1 and a company cost of capital of 15%. A new project comes along with a beta of 2 and an expected return (IRR) of 24%. Putting the project s beta into the CAPM gives the project a return of 25% based on project risk. The firm should
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A. |
Accept the project because the IRR is greater than the company cost of capital |
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B. |
Accept the project because the CAPM return is greater than the IRR |
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C. |
Reject the project because the CAPM return is greater than the IRR |
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D. |
Reject the project because the IRR is greater than the company cost of capital |
Combo Inc. is a big conglomerate with two divisions. One division (MIN) is in mining and another is in transportation (TRAN). MIN has a weighted average cost of capital (WACC) of 14%. TRAN has a WACC of 10%. Which of the following statements is correct?
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Combo’s WACC will be greater than 14% |
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B. |
Combo should use 10% for evaluating all projects |
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C. |
Combo should use 14% for evaluating all projects |
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D. |
Combo should use a different WACC for each division |
If regression of the stock’s returns against the market gives you an r-square of .77, then
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77% of the variance in the stock is explained by changes in the market |
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77% of the variance in the stock is unique to the stock |
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You cannot use beta for estimating the stock return |
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