Question 1: You were hired as a consultant to Locke Company, and you were provided with the following data: Target capital structure: 40% debt, 10% preferred, and 50% common equity. The interest rate on new debt is 7.5%, the yield on the preferred is 7.0%, the cost of retained earnings is 11.50%, and the tax rate is 40%. The firm will not be issuing any new stock. What is the firm's WACC?
- 8.25%
- 8.38%
- 8.49%
- 8.61%
- 8.76%
Question 2: To help finance a major expansion, Dimkoff Development Company sold a bond several years ago that now has 20 years to maturity. This bond has a 7% annual coupon, paid quarterly, and it now sells at a price of $1,103.58. The bond cannot be called and has a par value of $1,000. If Dimkoff's tax rate is 40%, what component cost of debt should be used in the WACC calculation?
- 3.03%
- 3.28%
- 3.66%
- 3.85%
- 4.04%
Question 3: A company's perpetual preferred stock currently trades at $80 per share and pays a $6.00 annual dividend per share. If the company were to sell a new preferred issue, it would incur a flotation cost of 4%. What would the cost of that capital be?
- 7.51%
- 7.81%
- 7.99%
- 8.36%
- 8.62%
Question 4: Assume that you are a consultant to Morton Inc., and you have been provided with the following data: D1 = $1.00; P0 = $25.00; and g = 6% (constant). What is the cost of equity from retained earnings based on the DCF approach?
- 9.79%
- 9.86%
- 10.00%
- 10.20%
- 10.33%
Question 5: Heino Inc. hired you as a consultant to help them estimate their cost of capital. You have been provided with the following data: rRF = 5.0%; MRP = 5.0%; and b = 1.1. Based on the CAPM approach, what is the cost of equity from retained earnings?
- 10.50%
- 10.71%
- 10.88%
- 11.03%
- 11.14%