2. (TCO 5) Royal Petroleum Co. can buy a piece of equipment that can be financed
ID: 2690938 • Letter: 2
Question
2. (TCO 5) Royal Petroleum Co. can buy a piece of equipment that can be financed with debt at a cost of 6 percent (after-tax) and common equity at a cost of 18 percent. Assume debt and common equity each represent 50 percent of the firm's capital structure. What is the weighted average cost of capital? (Points : 4) between 3 and 9% exactly 12% more than 14% exactly 11% none of the above 3. (TCO 5, 6 and 7) An issue of common stock is expected to pay a dividend of $4.80 at the end of the year. Its growth rate is equal to eight percent. If the required rate of return is 13 percent, what is its current price? (Points : 4) $103.68 $36.92 $96.00 none of these 4. (TCO 5, 6 and 7) Which of the following is true regarding the cost of debt? (Points : 4) It is the return that the firmExplanation / Answer
2. 12%
3. $103.68
4. It is the return that the firm’s creditors demand on new borrowing. It is always equal to the weighted cost of capital
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