CF 1.11 18.02

None

• A. 1.70, 2.52, and 2.73.
• B. 1.70, 2.79, and 3.37.
• C. 1.70, 2.81, and 3.44.

Q. The Gearing Company has an after-tax cost of debt capital of 4%, a cost of preferred stock of 8%, a cost of equity capital of 10%, and a weighted average cost of capital of 7%. Gearing intends to maintain its current capital structure as it raises additional capital. In making its capital-budgeting decisions for the average-risk project, the relevant cost of capital is:

• A. 4%.
• B. 7%.
• C. 8%.

Q. Kwam Solutions must raise €120 million. Kwam has two primary sources of liquidity: €60 million of marketable securities (which can be sold with minimal liquidation/brokerage costs) and €30 million of bonds (which can be sold with 3% liquidation costs). Kwam can sell some or all of either of these portfolios. Kwam has a secondary source of liquidity, which would be to sell a large piece of real estate valued at €70 million (which would incur 10% liquidation costs). If Kwam sells the real estate, it must be sold entirely (a fractional sale is not possible). What is the lowest cost strategy for raising the needed €120 million?

• A. Sell €60 million of the marketable securities, €30 million of the bonds, and €34.3 million of the real estate property.
• B. Sell the real estate property and €50 million of the marketable securities.
• C. Sell the real estate property and €57 million of the marketable securities.

Using the debt-rating approach to find the cost of debt is most appropriate when market prices for a company’s debt are:

• A. below par value.
• B. unreliable.
• C. stable.

None

• A. 1.67.
• B. 1.97.
• C. 2.27.

Q. The cost of debt can be determined using the yield-to-maturity and bond rating approaches. If the bond rating approach is used, the:

• A. coupon is the yield.
• B. yield is based on the interest coverage ratio.
• C. company is rated and the rating can be used to assess the credit default spread of the company’s debt.

A company issues new 20-year $1,000 bonds with a coupon rate of 6.2% payable semiannually at an issue price of $1,030.34. Assuming a tax rate of 28%, the firm’s annual after-tax cost of debt (%) is closest to:

• A. 5.94.
• B. 4.28.
• C. 4.46.

None

• A. higher.
• B. equivalent.
• C. lower.

A class of noncallable, nonconvertible preferred stock was issued at $45.00 per share with a dividend of $5.25. The preferred stock is now trading at $60.00 per share. Earnings of the company are growing at 3.00%. The cost of preferred stock is closest to:

• A. 11.7%.
• B. 8.8%.
• C. 5.8%.

Q. The cost of equity is equal to the:

• A. expected market return.
• B. rate of return required by stockholders.
• C. cost of retained earnings plus dividends.