Chapter 14 - Cost of Capital
51. Handy Man, Inc. has zero coupon bonds outstanding that mature in 8 years. The bonds have a face value of $1,000 and a current market price of $640. What is the company's pre-tax cost of debt?
A. 2.55 percent B. 5.09 percent C. 5.66 percent D. 7.31 percent E. 7.48 percent
AACSB: Analytic Bloom's: Application Difficulty: Basic
Learning Objective: 14-2 Section: 14.3
Topic: Cost of debt
52. Dog Gone Good Engines has a bond issue outstanding with 17 years to maturity. These bonds have a $1,000 face value, a 9 percent coupon, and pay interest semi-annually. The bonds are currently quoted at 87 percent of face value. What is the company's pre-tax cost of debt if the tax rate is 38 percent? A. 4.10 percent B. 4.42 percent C. 6.61 percent D. 8.90 percent E. 10.67 percent
AACSB: Analytic Bloom's: Application Difficulty: Basic
Learning Objective: 14-2 Section: 14.3
Topic: Cost of debt
14-26
Chapter 14 - Cost of Capital
53. The Corner Bakery has a bond issue outstanding that matures in 7 years. The bonds pay interest semi-annually. Currently, the bonds are quoted at 101.4 percent of face value and carry a 9 percent coupon. What is the firm's aftertax cost of debt if the tax rate is 30 percent? A. 4.88 percent B. 5.36 percent C. 5.45 percent D. 6.11 percent E. 8.74 percent
AACSB: Analytic Bloom's: Application Difficulty: Basic
Learning Objective: 14-2 Section: 14.3
Topic: Cost of debt
54. The outstanding bonds of Tech Express are priced at $989 and mature in 8 years. These bonds have a 6 percent coupon and pay interest annually. The firm's tax rate is 39 percent. What is the firm's aftertax cost of debt? A. 3.01 percent B. 3.22 percent C. 3.35 percent D. 3.77 percent E. 4.41 percent
AACSB: Analytic Bloom's: Application Difficulty: Basic
Learning Objective: 14-2 Section: 14.3
Topic: Cost of debt
14-27
Chapter 14 - Cost of Capital
55. Simple Foods has a zero coupon bond issue outstanding that matures in 9 years. The bonds are selling at 42 percent of par value. What is the company's aftertax cost of debt if the tax rate is 38 percent? A. 5.48 percent B. 5.73 percent C. 6.12 percent D. 7.73 percent E. 9.88 percent
AACSB: Analytic Bloom's: Application Difficulty: Basic
Learning Objective: 14-2 Section: 14.3
Topic: Cost of debt
56. Grill Works and More has 8 percent preferred stock outstanding that is currently selling for $49 a share. The market rate of return is 14 percent and the firm's tax rate is 37 percent. What is the firm's cost of preferred stock? A. 14.77 percent B. 15.29 percent C. 15.67 percent D. 16.33 percent E. 16.54 percent
Rp = (0.08 ? $100)/$49 = 16.33 percent
AACSB: Analytic Bloom's: Application Difficulty: Basic
Learning Objective: 14-2 Section: 14.3
Topic: Cost of preferred
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Chapter 14 - Cost of Capital
57. Samuelson Plastics has 7.5 percent preferred stock outstanding. Currently, this stock has a market value per share of $52 and a book value per share of $38. What is the cost of preferred stock?
A. 7.50 percent B. 13.88 percent C. 14.42 percent D. 19.29 percent E. 19.74 percent
Rp = (0.075 ? $100)/$52 = 14.42 percent
AACSB: Analytic Bloom's: Application Difficulty: Basic
Learning Objective: 14-2 Section: 14.3
Topic: Cost of preferred
58. New York Deli's has 7 percent preferred stock outstanding that sells for $36 a share. This stock was originally issued at $50 per share. What is the cost of preferred stock? A. 13.68 percent B. 14.00 percent C. 14.29 percent D. 19.44 percent E. 19.80 percent
Rp = (0.07 ? $100)/$36 = 19.44 percent
AACSB: Analytic Bloom's: Application Difficulty: Basic
Learning Objective: 14-2 Section: 14.3
Topic: Cost of preferred
14-29
Chapter 14 - Cost of Capital
59. Nelson's Landscaping has 1,200 bonds outstanding that are selling for $990 each. The company also has 2,500 shares of preferred stock at a market price of $28 a share. The common stock is priced at $37 a share and there are 28,000 shares outstanding. What is the weight of the common stock as it relates to the firm's weighted average cost of capital? A. 43.08 percent B. 45.16 percent C. 47.11 percent D. 54.00 percent E. 55.45 percent
AACSB: Analytic Bloom's: Application Difficulty: Basic
Learning Objective: 14-3 Section: 14.4
Topic: Weighted average
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