Understanding Cost of Capital

What is the cost of capital?

Tax benefits will (a)   the cost of capital.

Floatation costs will (a)   the cost of capital.

If a firm sells new stock for $50.00 a share and incurs $5 in flotation costs, and the investors have a required rate of return of 15%, what is the cost of capital?

• 0.15 or 15%

• 0.1667 or 16.67%

• 0.075 or 7.5%

• 0.10 or 10%

Determine the cost for a preferred stock that pays annual dividend of $4.25, has current stock price $58.50, and incurs flotation costs of $1.375 per share.

• 0.074 or 7.44%

• 0.08 or 8%

• 0.06 or 6%

• 0.10 or 10%

What is the 2 commonly used methods for estimating common stockholder’s required rate of return?

Why is the cost of retained earnings generally lower than the cost of issuing new common stock?

What is the WACC for a firm that borrows money at 8% interest after taxes and pays 10% for equity, raising capital in ratio of 60% debt and 40% equity?

• 8.8%

• 9.2%

• 9.6%

• 10.0%

Why use divisional WACC?

Draw a meme/emoji when you see WACC question in the final exam!