Finance cost of Capital
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finance_-_cost_of_capital.docxFINANCE – Cost of Capital
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1- As a business consultant, you are advising Darnay Inc regarding a potential acquisition. An important part of this work is estimating Darnay's cost of capital. The table below contains information you have already gathered for the firm. The firm's tax rate is 33%. What is Darnay's estimated weighted average cost of capital? (Enter your answer as a yearly % rate, rounding to 2 places, e.g., 12.34)
|
|
Market Value |
Book Value |
Cost of Capital |
|
Debt |
$6.7b |
$6.5b |
5.7% |
|
Preferred equity |
$2.2b |
$2.1b |
8.7% |
|
Common equity |
$7.2b |
$3.5b |
19.1% |
Answer:
2- Your firm's beta is 0.97, the risk free rate is 5.1%, the expected market return is 12.5%, and the tax rate is 29%. What is your firm's estimated cost of common equity? (Enter your answer as a %, rounding to 2 places, e.g., 12.34)
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Question 3
Badger Corp (BC) just paid a quarterly dividend of $3.39 per share. The concensus analyst estimate is that the dividend will increase by 2.8% each year, beginning with the next dividend. The stock is currently trading at $100.90 per share. What is BC's estimated cost of common equity? (Enter your answer as an annual % rate (APR), rounding to 2 places, e.g., 12.34)
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Question 4
You have been assigned the task of updating your firm's cost of capital. First on the agenda is the cost of common equity. Your firm pays a quarterly dividend. Next dividend is expected to be $1.85 per share. Over the last several years, the board has increased the dividend by 0.9% per year, and anticipates continuing this practice. The stock is currently trading at $68.55 per share. The tax rate is 29%. Note that all items might not be needed. (Enter your answer as an annual % rate (APR), rounding to 2 places, e.g., 12.34)
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Question 5
Duke Energy has a 6.28% preferred stock issue outstanding (par value of $25 per share). Current price is $23.31 per share. Duke's tax rate is 27%. Compute the cost of preferred equity for Duke. Do not round the dividend. (Enter your answer as an annual % rate (APR), rounding to 2 places, e.g., 12.34)
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Question 6
Calculate the yield to maturity (i.e., YTM) for the following bond. The bond matures in 21 years, has a coupon rate of 3.2% with semi-annual payments. The par value of the bond is $1000, while the current market value equals $809.45. (Round to 100th of a percent and enter your answer as a percentage, e.g., 12.34 for 12.34%)
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Question 7
Determine the cost of preferred equity for a firm with the following information. The firm's preferred stock pays a quarterly dividend of $0.39 per share. Par value is $25 per share. The preferred stock is currently trading for $23.45 per share. (Enter your answer as an annual % rate (APR), rounding to 2 places, e.g., 12.34)
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Question 8
Work done last year by your work group estimated that your firm's cost of equity is 10.5%. The estimate is based on the CAPM using a beta of 0.86 and an expected market return of 11.7%. However, there is some uncertainty as to whether the correct rate was used for the risk free rate and no one can find the exact computations that show the rate used. Your task is to solve for the risk free rate.
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Question 9
Tellson's has a before tax cost of debt of 7.56%. The firm's tax rate is 34%. What is Tellson's after tax cost of debt? (Enter your answer as a %, rounding to 2 places, e.g., 12.34)
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Question 10
Estimate the cost of common equity for a firm, given the following information. For the next year, the firm plans to pay a dividend of $9.51 per share. The firm's stock is trading at $96.21 per share. The expected growth rate of the dividend is 3.0% per year. The firm's tax rate is 35%. (Enter your answer as an annual % rate (APR), rounding to 2 places, e.g., 12.34)
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Question 11
Your firm is contemplating a preferred stock issue. The stock would pay a quarterly dividend of $0.33 per share. Par value would be $25. The expected value of the preferred at issuance is $24.20 per share. Your firm would issue 3.5 million shares. The cost of issuance is estimated to be $2.0 million and the tax rate is 33%. What is the expected cost of capital for this new issue, after factoring in the flotation cost? (Enter your answer as an annual % rate (APR), rounding to 2 places, e.g., 12.34)
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Question 12
Use the Bond Yield + Risk Premium approach to estimate your firm's cost of common equity. The yield to maturity (YTM) for your ten year bonds is 7.85% and assume that the risk premium for your equity is 4.1% (for a point estimate, as opposed to a range). Answer as a %, 2 decimals (e.g., 12.34).
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Question 13
Your firm has prepared a $660 million ($s measured at par value), 30 year bond issue. The coupon rate is set at 6.10%. Par value is $1000. Coupon is paid semi-annually. Interest rates have changed since setting the coupon rate. The expected yield (YTM) is now 6.00%. The costs to issue the bond are $15.18 million. Your firm's marginal tax rate is 30%. What is the before-tax cost of debt for the new bond issue, after factoring in the flotation cost? ***NOTE: Answer as a % to 3 decimals, e.g., 7.321 ***
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Question 14
Your firm is borrowing $662,000 at 4.81% amortized over 6 years with quarterly payments. The lender is charging a 0.50% loan fee. What is the annual percentage rate (APR) on this loan after factoring in the loan fee? (Answer in % to 3 decimals, e.g., 12.345% as 12.345)
Answer:
