1. Why do organizations need a separate capital budget and what special types of analyses are included in the capital budgeting process?
DuPont’s class B preference share has a price of $75 and an annual dividend of $3.50. Calculate the cost of preference share.
a. The cost for DuPont’s class B preference share is 4.67% per annum.
b. The cost for DuPont’s class B preference share is 26.25% per annum.
c. The cost for DuPont’s class B preference share is 21.43% per annum.
d. The cost for DuPont’s class B preference share is 20% per annum.
2. Pfd Company has debt with a yield to maturity of 7%, a cost of equity of 13% and a cost of preference stock of 9%. The market values of its debt, preference stock and equity are $10 million, $3 million and $15 million, respectively, and its tax rate is 35%. What is this firm’s WACC?
a. The WACC (adjusted for tax) is 9.55%.
b. The WACC (adjusted for tax) is 8.36%.
c. The WACC (adjusted for tax) is 10.50%.
d. The WACC (adjusted for tax) is 10.43%.