1. Chelsea Fashions is expected to pay an annual dividend of $0.80 a share next year.
The market price
of the stock is $22.40 and the growth rate is 5%. What is the firm’s cost of equity?
A. 7.58%
B. 7.91%
C. 8.24%
D. 8.57%
2. Sweet Treat’s common stock is currently priced at $19.06 a share. The company just paid $1.15 per
share as its annual dividend. The dividends have been increasing by 2.5 percent annually and are
expected to continue doing the same. What is the firm’s cost of equity?
A. 8.68%
B. 8.47%
C. 6.18%
D. 6.03%
3. Grill Works and More has 8% preferred stock outstanding that is currently selling for $49 a share.
The market rate of return is 14% and firm’s tax rate is 37%. What is the firm’s cost of preferred
stock?
A. 14.77%
B. 16.33
C. 15.67
D. 15.29
4. Kelso’s has a debt-equity ratio of 0.55 and a tax rate of 35%. The firm does not issue preferred stock.
The cost of equity is 14.5% and the after-tax cost of debt is 4.8%. What is the weighted average cost
of capital?
A. 11.06%
B. 10.67%
C. 11.38%
D. 10.46%
5. Neotech Corporation 's 14 percent coupon rate, semiannual payment, $1000 par value 30-year
bonds currently sell at a price of $1353.54. If Neotech 's marginal tax rate is 40 percent, what is its
after-tax cost of debt?
A. 6.22%
B. 7.22%
C. 8.22%
D. 9.22%
6. Neotech Corporation 's 6 percent coupon rate, annual payment, $1000 par value 13-year bonds
currently sell at a price of $1040. If Neotech 's marginal tax rate is 32 percent, what is its after-tax
cost of debt?
A. 2.97%
B. 3.77%
C. 5.21%
D. 5.53%
7. The Choi Company’s next expected dividend, D1, is $3.18; its growth rate is 6 percent; and its stock
currently sells for $36. New stock can be sold to net the firm $32.40 per share. What is Choi’s
percentage flotation cost, F?
A. 9%
B. 10%
C. 11%
D. 12%
8. The Choi Company’s next expected dividend, D1, is $3.18; its growth rate is 6 percent; and its stock
currently sells for $36. New stock can be sold to net the firm $32.40 per share. What is Choi’s cost of
new common stock, re?
A. 14.8%
B. 15.8%
C. 16.8%
D. 17.8%
9. Maness Industries plans to issue some $100 par preferred stock with an 11 percent dividend. The
stock is selling on the market for $97.00, and Maness must pay flotation costs of 5 percent of the
market price. What is the cost of the preferred stock for Maness?
A. 10.83%
B. 9.39%
C. 11.94%
D. 12.37%
10. Hybrid Hydro Plants Inc., has $100 par preferred stock that pays a constant dividend equal to $15
per share. The stock currently sells for $125. If the company incurs a 3 percent flotation cost each
time it issues preferred stock, what is the cost of issuing preferred stock?
A. 10.38%
B. 9.39%
C. 11.94%
D. 12.37%
11. The Gupta Company’s cost of equity is 16 percent. Its before-tax cost of debt is 13 percent, and its
marginal tax rate is 40 percent. The equity and debt of the company are $1728 and $1152
respectively. Calculate Gupta’s after-tax weighted average cost of capital.
A. 11.21%
B. 12.72%
C. 9.36%
D. 7.8%
