Given the following information: interest rate 8% tax rate 30% dividend $1 price of the common stock $50 growth rate of dividends 7% debt ratio 40% ? a. Determine the firm's cost of capital. b. If the debt ratio rises to 50 percent and the cost of funds remains the same, what is the new cost of capital? c. If the debt ratio rises to 60 percent, the interest rate rises to 9 percent, and the price of the stock falls to $30, what is the cost of capital? Why is this cost different?
What will be an ideal response?
a. Cost of debt: .08(1 ? .3) = .056 = 5.6%Cost of equity: $1(1 + .07)/$50 + .07 = 9.1%Cost of capital: weights x costs .4 x .056 = .0224 .6 x .091 = .0546 .0770 = 7.7%?b.The cost of debt and equity are unchanged. Only the weights are changed. Cost of capital: weights x costs .5 x .056 = .0280 .5 x .091 = .0455 .0735 = 7.35%?c.Both the cost of debt and equity are changed. Cost of capital: weights x costs .6 x .063 = .0378 .4 x .106 = .0424 .0802 = 8.02%?The cost of capital changes as any of the components are changed. As the firm initially substitutes cheaper debt financing, the cost of capital declines (7.7% to 7.35%). However, as the firm uses more debt financing and becomes more financial leveraged, it becomes riskier, and the cost of capital rises (7.35% to 8.02%).
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On April 1 . 2014, Ziba Inc purchased as a temporary investment $100,000, face amount, 10% U.S. Treasury notes; they pay interest semiannually on January 1 and July 1 . The notes were purchased at 102 . Which of the following entries correctly records this purchase?
a. Trading Securities--10% U.S. Treasury Notes. 100,000 Interest Receivable......................... 2,500 Premium on Trading Securities............... 2,000 Cash..................................... 104,500 b. Trading Securities--10% U.S. Treasury Notes. 102,000 Interest Receivable......................... 2,500 Cash..................................... 104,500 c. Trading Securities--10% U.S. Treasury Notes. 100,000 Interest Receivable......................... 4,500 Cash..................................... 104,500 d. Trading Securities--10% U.S. Treasury Notes. 102,000 Cash..................................... 102,000
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A. rate B. factor C. point D. pay
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While waiting to have a bill corrected, the consumer
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