{"id":6926,"date":"2021-10-11T12:03:59","date_gmt":"2021-10-11T12:03:59","guid":{"rendered":"https:\/\/assignmenttutors.net\/blog\/ba-540-chapter-11-calculating-the-cost-of-capital\/"},"modified":"2021-10-11T12:03:59","modified_gmt":"2021-10-11T12:03:59","slug":"ba-540-chapter-11-calculating-the-cost-of-capital","status":"publish","type":"post","link":"https:\/\/assignmenttutors.net\/blog\/ba-540-chapter-11-calculating-the-cost-of-capital\/","title":{"rendered":"Ba 540 chapter 11 – calculating the cost of capital"},"content":{"rendered":"
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LG1\u00a0\u00a0\u00a0\u00a0 11-1\u00a0\u00a0\u00a0\u00a0 How would you handle calculating the cost of capital if a firm were planning to issue two different classes of common stock?<\/span><\/p>\n

LG2\u00a0\u00a0\u00a0\u00a0 11-2\u00a0\u00a0\u00a0\u00a0 Why don\u2019t we multiply the cost of preferred stock by one minus the tax rate, as we do for debt?<\/span><\/p>\n

LG2\u00a0\u00a0\u00a0\u00a0 11-3\u00a0\u00a0\u00a0\u00a0 Expressing WACC in terms of iE<\/sub><\/em>, iP<\/sub><\/em>, and iD<\/sub><\/em>, what is the theoretical minimum for the WACC?<\/span><\/p>\n

LG3\u00a0\u00a0\u00a0\u00a0 11-4\u00a0\u00a0\u00a0\u00a0 Under what situations would you want to use the CAPM approach for estimating the component cost of equity?\u00a0 The constant-growth model?<\/span><\/p>\n

LG3\u00a0\u00a0\u00a0\u00a0 11-5\u00a0\u00a0\u00a0\u00a0 Could you calculate the component cost of equity for a stock with nonconstant expected growth rates in dividends if you didn\u2019t have the information necessary to compute the component cost using the CAPM?\u00a0 Why or why not?<\/span><\/p>\n

LG4\u00a0\u00a0\u00a0\u00a0 11-6\u00a0\u00a0\u00a0\u00a0 Why do we use market-based weights instead of book-value-based weights when computing the WACC?<\/span><\/p>\n

LG5\u00a0\u00a0\u00a0 11-7\u00a0\u00a0\u00a0\u00a0 Suppose your firm wanted to expand into a new line of business quickly, and that management anticipated that the new line of business would constitute over 80 percent of your firm\u2019s operations within three years.\u00a0 If the expansion was going to be financed partially with debt, would it still make sense to use the firm\u2019s existing cost of debt, or should you compute a new rate of return for debt based on the new line of <\/span><\/p>\n

\u00a0<\/span><\/p>\n

?<\/span><\/p>\n

business<\/span><\/p>\n

\u00a0<\/p>\n

LG6\u00a0\u00a0\u00a0\u00a0 11-8\u00a0\u00a0\u00a0\u00a0 Explain why the divisional cost of capital approach may cause problems if new projects are assigned to the wrong division.<\/span><\/p>\n

LG7\u00a0\u00a0\u00a0\u00a0 11-9\u00a0\u00a0\u00a0\u00a0 When will the subjective approach to forming divisional WACCs be better than using the firm-wide WACC to evaluate all projects?<\/span><\/p>\n

LG8\u00a0\u00a0\u00a0\u00a0 11-10\u00a0\u00a0 Suppose a new project was going to be financed partially with retained earnings.\u00a0 What flotation costs should you use for retained earnings?<\/span><\/p>\n

LG3\u00a0\u00a0\u00a0\u00a0 11-1\u00a0\u00a0\u00a0\u00a0 Cost of Equity<\/strong> Diddy Corp. stock has a beta of 1.2, the current risk-free rate is 5 percent, and the expected return on the market is 13.5 percent.\u00a0 What is Diddy\u2019s cost of equity?<\/span><\/p>\n

LG3\u00a0\u00a0\u00a0\u00a0 11-2\u00a0\u00a0\u00a0\u00a0 Cost of Equity<\/strong> JaiLai Cos. stock has a beta of 0.9, the current risk-free rate is 6.2 percent, and the expected return on the market is 12 percent.\u00a0 What is JaiLai\u2019s cost of equity?<\/span><\/p>\n

LG3\u00a0\u00a0\u00a0\u00a0 11-3\u00a0\u00a0\u00a0\u00a0 Cost of Debt<\/strong> Oberon, Inc. has a $20 million (face value) 10-year bond issue selling for 97 percent of par that pays an annual coupon of 8.25 percent.\u00a0 What would be Oberon\u2019s before-tax component cost of debt?<\/span><\/p>\n

LG3\u00a0\u00a0\u00a0\u00a0 11-4\u00a0\u00a0\u00a0\u00a0 Cost of Debt<\/strong> KatyDid Clothes has a $150 million (face value) 30-year bond issue selling for 104 percent of par that carries a coupon rate of 11 percent, paid semiannually.\u00a0 What would be Katydid\u2019s before-tax component cost of debt?<\/span><\/p>\n

LG3\u00a0\u00a0\u00a0\u00a0 11-5\u00a0\u00a0\u00a0\u00a0 Tax Rate<\/strong> Suppose that LilyMac Photography expects EBIT to be approximately $200,000 per year for the foreseeable future, and that they have 1,000 ten-year, nine percent annual coupon bonds outstanding. What would the appropriate tax rate be for use in the calculation of the debt component of LilyMac\u2019s WACC?<\/span><\/p>\n

LG3\u00a0\u00a0\u00a0\u00a0 11-6\u00a0\u00a0\u00a0\u00a0 Tax Rate<\/strong> PDQ, Inc. expects EBIT to be approximately $11 million per year for the foreseeable future, and that they have 25,000 20-year, eight percent annual coupon bonds outstanding. What would the appropriate tax rate be for use in the calculation of the debt component of PDQ\u2019s WACC?<\/span><\/p>\n

LG3\u00a0\u00a0\u00a0\u00a0 11-7\u00a0\u00a0\u00a0\u00a0 Cost of Preferred Stock<\/strong> ILK has preferred stock selling for 97 percent of par that pays an eight percent annual coupon.\u00a0 What would be ILK\u2019s component cost of preferred stock?<\/span><\/p>\n

LG3\u00a0\u00a0\u00a0\u00a0 11-8\u00a0\u00a0\u00a0\u00a0 Cost of Preferred Stock<\/strong> Marme, Inc. has preferred stock selling for 96 percent of par that pays an 11 percent annual coupon.\u00a0 What would be Marme\u2019s component cost of preferred stock?<\/span><\/p>\n

LG4\u00a0\u00a0\u00a0\u00a0 11-9\u00a0\u00a0\u00a0\u00a0 Weight of Equity <\/strong>FarCry Industries, a maker of telecommunications equipment, has two million shares of common stock outstanding, one million shares of preferred stock outstanding, and 10,000 bonds.\u00a0 If the common shares are selling for $27 per share, the preferred shares are selling for $14.50 per share, and the bonds are selling for 98 percent of par, what would be the weight used for equity in the computation of FarCry\u2019s WACC?<\/span><\/p>\n

LG4\u00a0\u00a0\u00a0\u00a0 11-10\u00a0\u00a0 Weight of Equity<\/strong> OMG Inc. has four million shares of common stock outstanding, three million shares of preferred stock outstanding, and 5,000 bonds.\u00a0 If the common shares are selling for $17 per share, the preferred shares are selling for $26 per share, and the bonds are selling for 108 percent of par, what would be the weight used for equity in the computation of OMG\u2019s WACC?<\/span><\/p>\n

LG4\u00a0\u00a0\u00a0\u00a0 11-11\u00a0\u00a0 Weight of Debt<\/strong> FarCry Industries, a maker of telecommunications equipment, has two million shares of common stock outstanding, one million shares of preferred stock outstanding, and 10,000 bonds.\u00a0 If the common shares are selling for $27 per share, the preferred shares are selling for $14.50 per share, and the bonds are selling for 98 percent of par, what weight should you use for debt in the computation of FarCry\u2019s WACC?<\/span><\/p>\n

LG4\u00a0\u00a0\u00a0\u00a0 11-12\u00a0\u00a0 Weight of Debt<\/strong> OMG Inc. has four million shares of common stock outstanding, three million shares of preferred stock outstanding, and 5,000 bonds.\u00a0 If the common shares are selling for $27 per share, the preferred shares are selling for $26 per share, and the bonds are selling for 108 percent of par, what\u00a0 weight should you use for debt in the computation of OMG\u2019s WACC?<\/span><\/p>\n

LG4\u00a0\u00a0\u00a0\u00a0 11-13\u00a0\u00a0 Weight of Preferred Stock<\/strong> FarCry Industries, a maker of telecommunications equipment, has two million shares of common stock outstanding, one million shares of preferred stock outstanding, and 10,000 bonds.\u00a0 If the common shares sell for $27 per share, the preferred shares sell for $14.50 per share, and the bonds sell for 98 percent of par, what weight should you use for preferred stock in the computation of FarCry\u2019s WACC?<\/span><\/p>\n

LG4\u00a0\u00a0\u00a0\u00a0 11-14\u00a0\u00a0 Weight of Preferred Stock<\/strong> OMG Inc. has four million shares of common stock outstanding, three million shares of preferred stock outstanding, and 5,000bonds.\u00a0 If the common shares sell for $17 per share, the preferred shares sell for $16 per share, and the bonds sell for 108 percent of par, what weight should you use for preferred stock in the computation of OMG\u2019s WACC?<\/span><\/p>\n

LG2\u00a0\u00a0\u00a0\u00a0 11-15\u00a0\u00a0 WACC<\/strong> Suppose that TapDance, Inc.\u2019s capital structure features 65 percent equity, 35 percent debt, and that its before-tax cost of debt is eight percent, while its cost of equity is 13 percent.\u00a0 If the appropriate weighted average tax rate is 34 percent, what will be TapDance\u2019s WACC?<\/span><\/p>\n

\u00a0<\/p>\n

LG2\u00a0\u00a0\u00a0\u00a0 11-16\u00a0\u00a0 WACC<\/strong> Suppose that JB Cos. has a capital structure of 78 percent equity, 22 percent debt, and that its before-tax cost of debt is 11 percent while its cost of equity is 15 percent.\u00a0 If the appropriate weighted average tax rate is 25 percent, what will be JB\u2019s WACC?<\/span><\/p>\n

\u00a0<\/p>\n

LG2\u00a0\u00a0\u00a0\u00a0 11-17\u00a0\u00a0 WACC<\/strong> Suppose that B2B, Inc. has a capital structure of 37 percent equity, 17 percent preferred stock, and 46 percent debt.\u00a0 If the before-tax component costs of equity, preferred stock and debt are 14.5 percent, 11 percent and 9.5 percent, respectively, what is B2B\u2019s WACC if the firm faces an average tax rate of 30 percent?<\/span><\/p>\n

LG2\u00a0\u00a0\u00a0\u00a0 11-18\u00a0\u00a0 WACC<\/strong> Suppose that MNINK Industries\u2019 capital structure features 63 percent equity, seven percent preferred stock, and 30 percent debt.\u00a0 If the before-tax component costs of equity, preferred stock and debt are 11.60 percent, 9.5 percent , and nine percent, respectively, what is MNINK\u2019s WACC if the firm faces an average tax rate of 34 percent?<\/span><\/p>\n

LG3\u00a0\u00a0\u00a0\u00a0 11-19\u00a0\u00a0 WACC<\/strong> TAFKAP Industries has three million shares of stock outstanding selling at $17 per share and an issue of $20 million in 7.5 percent, annual coupon bonds with a maturity of 15 years, selling at 106 percent of par.\u00a0 If TAFKAP\u2019s weighted average tax rate is 34 percent and its cost of equity is 14.5 percent, what is TAFKAP\u2019s WACC?<\/span><\/p>\n

\u00a0<\/p>\n

LG3\u00a0\u00a0\u00a0\u00a0 11-20\u00a0\u00a0 WACC<\/strong> Johnny Cake Ltd. has ten million shares of stock outstanding selling at $23 per share and an issue of $50 million in nine percent, annual coupon bonds with a maturity of 17 years, selling at 93.5 percent of par.\u00a0 If Johnny Cake\u2019s weighted average tax rate is 34 percent, its next dividend is expected to be $3 per share, and all future dividends are expected to grow at six percent per year, indefinitely, what is its WACC?<\/span><\/p>\n

LG4\u00a0\u00a0\u00a0\u00a0 11-21\u00a0\u00a0 WACC<\/strong> Weights <\/strong>BetterPie Industries has three million shares of common stock outstanding, two million shares of preferred stock outstanding, and 10,000 bonds.\u00a0 If the common shares are selling for $47 per share, the preferred shares are selling for $24.50 per share, and the bonds are selling for 99 percent of par, what would be the weights used in the calculation of BetterPie\u2019s WACC?<\/span><\/p>\n

LG4\u00a0\u00a0\u00a0\u00a0 11-22\u00a0\u00a0 WACC<\/strong> Weights <\/strong>WhackAmOle has two million shares of common stock outstanding, 1.5 million shares of preferred stock outstanding, and 50,000 bonds. If the common shares are selling for $63 per share, the preferred shares are selling for $52 per share, and the bonds are selling for 103 percent of par, what would be the weights used in the calculation of WhackAmOle\u2019s WACC?<\/span><\/p>\n

\u00a0<\/p>\n

LG8\u00a0\u00a0\u00a0 11-23\u00a0\u00a0 Flotation Cost <\/strong>Suppose that Brown-Murphies\u2019 common shares sell for $19.50 per share, that the firm is expected to set their next annual dividend at $0.57 per share, and that all future dividends are expected to grow by four percent per year, indefinitely.\u00a0 If Brown-Murphies faces a flotation cost of 13 percent on new equity issues, what will be the flotation-adjusted cost of equity?<\/span><\/p>\n

LG4\u00a0\u00a0\u00a0\u00a0 11-21\u00a0\u00a0 WACC<\/strong> Weights <\/strong>BetterPie Industries has three million shares of common stock outstanding, two million shares of preferred stock outstanding, and 10,000 bonds.\u00a0 If the common shares are selling for $47 per share, the preferred shares are selling for $24.50 per share, and the bonds are selling for 99 percent of par, what would be the weights used in the calculation of BetterPie\u2019s WACC?<\/span><\/p>\n

LG4\u00a0\u00a0\u00a0\u00a0 11-22\u00a0\u00a0 WACC<\/strong> Weights <\/strong>WhackAmOle has two million shares of common stock outstanding, 1.5 million shares of preferred stock outstanding, and 50,000 bonds. If the common shares are selling for $63 per share, the preferred shares are selling for $52 per share, and the bonds are selling for 103 percent of par, what would be the weights used in the calculation of WhackAmOle\u2019s WACC?<\/span><\/p>\n

LG8\u00a0\u00a0\u00a0 11-23\u00a0\u00a0 Flotation Cost <\/strong>Suppose that Brown-Murphies\u2019 common shares sell for $19.50 per share, that the firm is expected to set their next annual dividend at $0.57 per share, and that all future dividends are expected to grow by four percent per year, indefinitely.\u00a0 If Brown-Murphies faces a flotation cost of 13 percent on new equity issues, what will be the flotation-adjusted cost of equity?<\/span><\/p>\n

LG2\u00a0\u00a0\u00a0\u00a0 11-24\u00a0\u00a0 Flotation Cost <\/strong>A firm is considering a project that will generate perpetual after-tax cash flows of $15,000 per year beginning next year.\u00a0 The project has the same risk as the firm’s overall operations and must be financed externally.\u00a0 Equity flotation costs 14 percent and debt issues cost 4 percent on an after-tax basis.\u00a0 The firm’s D\/E ratio is 0.8.\u00a0 What is the most the firm can pay for the project and still earn its required return?<\/span><\/p>\n

LG6\u00a0\u00a0\u00a0\u00a0 11-25\u00a0\u00a0 Firm-Wide vs. Project-Specific WACCs <\/strong>An all-equity firm is considering the projects shown below.\u00a0 The T-bill rate is four percent and the market risk premium is seven percent.\u00a0 If the firm uses its current WACC of 12 percent to evaluate these projects, which project(s), if any, will be incorrectly rejected?<\/span><\/p>\n

\u00a0<\/p>\n

LG6\u00a0\u00a0\u00a0\u00a0 11-26\u00a0\u00a0 Firm-Wide vs. Project-Specific WACCs <\/strong>An all-equity firm is considering the projects shown below.\u00a0 The T-bill rate is four percent and the market risk premium is seven percent.\u00a0 If the firm uses its current WACC of 12 percent to evaluate these projects, which project(s), if any, will be incorrectly accepted?<\/span><\/p>\n

\u00a0<\/p>\n

LG7\u00a0\u00a0\u00a0\u00a0 11-27\u00a0\u00a0 Divisional WACCs <\/strong>Suppose your firm has decided to use a divisional WACC approach to analyze projects.\u00a0 The firm currently has four divisions, A through D, with average betas for each division of 0.6, 1.0, 1.3 and 1.6, respectively.\u00a0 If all current and future projects will be financed with half debt and half equity, and if the current cost of equity (based on an average firm beta of 1.0 and a current risk-free rate of seven percent) is 13 percent and the after-tax yield on the company\u2019s bonds is eight percent, what will the WACCs be for each division?<\/span><\/p>\n

\u00a0<\/p>\n

LG7\u00a0\u00a0\u00a0\u00a0 11-28\u00a0\u00a0 Divisional WACCs <\/strong>Suppose your firm has decided to use a divisional WACC approach to analyze projects. The firm currently has four divisions, A through D, with average betas for each division of 0.9, 1.1, 1.3, and 1.5, respectively. If all current and future projects will be financed with 25 percent debt and 75 percent equity, and if the current cost of equity (based on an average firm beta of 1.2 and a current risk-free rate of four percent) is 12 percent and the after-tax yield on the company\u2019s bonds is nine percent, what will the WACCs be for each division?<\/span><\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

LG1\u00a0\u00a0\u00a0\u00a0 11-1\u00a0\u00a0\u00a0\u00a0 How would you handle calculating the cost of capital if a firm were planning to issue two different classes of common stock? LG2\u00a0\u00a0\u00a0\u00a0 11-2\u00a0\u00a0\u00a0\u00a0 Why don\u2019t we multiply the cost of preferred stock by one minus the tax rate, as we do for debt? LG2\u00a0\u00a0\u00a0\u00a0 11-3\u00a0\u00a0\u00a0\u00a0 Expressing WACC in terms of iE, iP, […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[31],"tags":[],"class_list":["post-6926","post","type-post","status-publish","format-standard","hentry","category-homework-help"],"_links":{"self":[{"href":"https:\/\/assignmenttutors.net\/blog\/wp-json\/wp\/v2\/posts\/6926","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/assignmenttutors.net\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/assignmenttutors.net\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/assignmenttutors.net\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/assignmenttutors.net\/blog\/wp-json\/wp\/v2\/comments?post=6926"}],"version-history":[{"count":0,"href":"https:\/\/assignmenttutors.net\/blog\/wp-json\/wp\/v2\/posts\/6926\/revisions"}],"wp:attachment":[{"href":"https:\/\/assignmenttutors.net\/blog\/wp-json\/wp\/v2\/media?parent=6926"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/assignmenttutors.net\/blog\/wp-json\/wp\/v2\/categories?post=6926"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/assignmenttutors.net\/blog\/wp-json\/wp\/v2\/tags?post=6926"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}