Question 1

Suppose that TW, Inc. has a capital structure of 25 percent equity, 15 percent preferred stock, and 60 percent debt. If the before-tax component costs of equity, preferred stock and debt are 13.5 percent, 9.5 percent and 4 percent, respectively, what is TW's WACC if the firm faces an average tax rate of 30 percent?

Accepted Answer

A)  6.19 percent
B)  6.48 percent
C)  7.2 percent
D)  9.0 percent

Question 2

A firm has 5,000,000 shares of common stock outstanding, each with a market price of $8.00 per share. It has 25,000 bonds outstanding, each selling for $1,100 with a $1,000 face value. The bonds mature in 12 years, have a coupon rate of 9 percent, and pay coupons semiannually. The firm's equity has a beta of 1.4, and the expected market return is 15 percent. The tax rate is 35 percent and the WACC is 14 percent. Calculate the risk-free rate.

Accepted Answer

A)  2.05 percent
B)  15.27 percent
C)  20.18 percent
D)  1.19 percent

Exam 11: Calculating the Cost of Capital

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Exam 11: Calculating the Cost of Capital

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