Chapter 9 Study Problems
9-1.
Opportunity Cost – the cost of a choice in terms of the best alternative foregone.
Capital Structure – The mix of sources of funds used by the firm to finance its investments in
assets.
Cost of capital – A weighted average of the costs of the firm’s sources of capital.
Transaction Costs – The expenses that a firm incurs when raising funds b y issuing a particular
type of security.
9-2.
a. Before tax cost = 8.32%
Marginal tax rate = 21%
Therefore, after tax cost of debt = 6.57%
b. Dividend = 1.80
Growth rate = 7%
Current price = 27.50
Flotation costs = 5%
Net Price = 26.13
Therefore, the cost of new common stock = 14.37%
c. Expected dividend = 3.50
Growth rate = 7%
Current market price = 43
Therefore, cost of internal common equity = 15.14%
d. Therefore, cost of preferred stock = 8.77%
e. Therefore, after tax cost of debt = 9.48%
9-3. Brille’s cost of equity for the new issue is 12.92%
9-4. Carraway’s after-tax cost of debt is 7.27%
9-5. The cost of capital for the preferred stock is 8.85%
Dividend paid / Net price.
4.25 / 48 = 8.85%
9-6. Par value of bond = $1000
Coupon rate = 12%
$1000 x 12% = $120
Current price of bond = $945
No. of coupon payments = 15
Using excel, before tax cost is 13%
Weight of Debt = 33%
Tax rate = 21%
(0.33 x 13%) x (1 – 0.21) = 0.033891
Therefore, the after-tax cost for Zephyr Corporation is 3.39%
9-15.
a. 0.4 x 8% x (1-0.21) + 0.6 x 13.6% = 10.68%
Therefore, Crawford’s weighted average cost of capital is 10.68%
b. 0.307 x 8% x (1 – 0.21) + 0.693 x 13% = 10.94%
Therefore, Crawford’s new weighted average cost of capital is =10.94%
9-17.
a. Proportion of debt financing = 7.69% proportion of equity financing = 92.31%
b. ABBC’s weighted average cost of capital is 14.33%
c. 3.5 x 32,564,000 = 113,974,000