1. Adventure Outfitter Corp. can sell common stock for $27 per share and its inv

Question

1. Adventure Outfitter Corp. can sell common stock for $27 per share and its investors require a 17% return. However, the administrative or flotation costs associated with selling the stock amount to $2.70 per share. What is the cost of capital for Adventure Outfitter if the corporation raises money by selling common stock?

a. 27.00%

b. 18.89%

2. Due to changes in regulatory requirements, the transactions costs associated with selling corporate securities increased by $1 per share. This change will

a. cause the cost of capital to increase.

b. cause the cost of capital to decrease.

3. JPR Company's preferred stock is currently selling for $28.00, and pays a perpetual annual dividend of $2.00 per share. Underwriters of a new issue of preferred stock would charge $3 per share in flotation costs. The firm's tax rate is 40%. Compute the cost of new preferred stock for JPR.

a. 8.00%

b. 4.80%

4. A firm's weighted average cost of capital is determined using all of the following inputs EXCEPT

a. . the firm's after tax cost of debt.

b.. the probability distribution of expected returns

5. Which of the following should NOT be considered when calculating a firm's WACC?

a. cost of carrying inventory

b. cost of preferred stock

Explanation / Answer

1. B. 18.89%

Working: Net Proceeds from Stock: 27 - 2.7 = $24.30

Required Return = 27 x 17% = 4.59

Cost Of Capital = 4.59 / 24.30 = 18.89%

2. a. cause the cost of capital to increase.

The increase amount of selling Price will result in Increase in cost of Capital.

3. a. 8.00 %

Working: 28 - 3 = 25, Dividend = $2, Cost of stock = 2/25 = 8%

4. b.. the probability distribution of expected returns

5. a. cost of carrying inventory

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