Question 6 Suppose your company has an equity beta of 1.0 and the current risk-f

Question

Question 6

Suppose your company has an equity beta of 1.0 and the current risk-free rate is 6.0%. If the expected market risk premium is 8.6%, what is your cost of equity capital?

8.1%

9.6%

10.3%

14.6%.

Question 7

A stock sells for $20 per share, its next dividend expected to pay (D1) is $1.00, and its growth rate is a constant 6%. What is its cost of common stock?

5.3%

11.0%

11.3%

11.6%

Question 8

If a firm's before-tax cost of preferred stock is 10% and the firm has a 35% marginal tax rate, what is the firm's after-tax cost of preferred stock?

6.5%

3.5%

10.0%

None of above is correct.

Question 9

A company has preferred stock that can be sold for $100 per share. The preferred stock pays an annual dividend $10. Therefore, the cost of preferred stock is:

5.67%

5.0%

9.43%

10.0%

Question 10

A firm has a target capital structure of 30% debt, 20% preferred stock, and 50% common equity. The company's after-tax cost of debt is 5%, its cost of preferred stock is 10%, and its cost of retained earnings is 12%. What is the company's weighted average cost of capital if retained earnings are used to fund the common equity portion?

8.0%

9.50%

9.10%

10.80%.

8.1%

9.6%

10.3%

14.6%.

Explanation / Answer

6)

beta = 1

risk free rate = rf = 6% = 0.06

market risk premium = (E(Rm) - rf) = 8.6% = 0.086

cost of equity capital using CAPM model

k = rf + beta * (E(Rm) - rf)

= 0.06 + 1 * (0.086)

= 0.146 = 14.6%

7)

Ke = (D1/P0) + g

Ke= cost of equity

D1= next period dividend

P0 = current stock price

g =dividend growth rate

Ke = (D1/P0) + g

Ke = (1/20) + 0.06

= 0.11 = 11%

8)

answer is 10%

tax rate calculation comes only in cost of debt calculation

cost of preferred stock , Kp = Dps / Pnet

9)

Kp = Dps / Pnet

Dps = dividend

Pnet = net price

here it is 100

Dps = 10

hence Kp = 10/100 = 10%

cost of preferred stock is 10%

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