Capital budgeting decisions are based upon cost-benefit analysis. A project's net investment is compared to the project's net cash flows in order to make a decision.
Indicate whether the statement is true or false
In capital budgeting, the cost of starting a project is called the annual net cash flow.
Indicate whether the statement is true or false
Penny's Budget Gourmet Restaurants has a current capital structure that is 70 equity, 20 debt, and 10 preferred stock. This is considered optimal. Penny is considering a 100 million capital budgeting project.
Penny has estimated the following:
After-tax cost of debt: 7.0
Cost of preferred stock: 8.0
Cost of internal equity: 13.0
Cost of external equity: 15.0
Penny expects to have 40 million of new retained earnings available to finance this project. What is Marion's cost of capital for this project?
A) 12.10
B) 10.75
C) 11.90
D) 12.45
Marion's Miraculous Resorts has a current capital structure that is 50 equity, 40 debt, and 10 preferred stock. This is considered optimal. Marion is considering a 40 million capital budgeting project.
Marion has estimated the following:
After-tax cost of debt: 8.5
Cost of preferred stock: 9.5
Cost of internal equity: 14.0
If all equity comes from internal sources, what should Marion's cost of capital be for this project?
A) 10.67
B) 11.35
C) 9.45
D) 12.15
Shamas Famous Restaurants expects to pay a common stock dividend of 1.50 per share next year (d1 ).
Dividends are expected to grow at a 4 rate for the foreseeable future. Shamas' common stock is selling for 18.50 per share and issuance costs are 3.50 per share. What is Shamas cost of internal equity?
A) 20.59
B) 12.11
C) 14.00
D) 10.00
Spencers Magic Shows Incorporated is financed 100 with equity and intends to remain this way. Spencers' common stock beta is 0.85, the expected market return (average market return) is 14, and the risk-free rate is 6.
If all of Spencers' equity is internal, what are the cost of equity and the weighted average cost of capital for Spencers?
A) 12.80
B) 5.48
C) 14.00
D) 13.10
Jose's Cantinas Incorporated plans to issue preferred stock at a price of 48 per share. The annual dividend will be 5.10 per share and issuance costs are expected to be 3.00 per share.
What is the cost of raising funds with preferred stock for Jose's?
A) 10.85
B) 10.20
C) 10.63
D) 11.33
Young's Specialized Cruises plans to issue preferred stock at a price of 25 per share. The annual dividend will be 2.18 per share and issuance costs are expected to be 2.00 per share.
What is the cost of raising funds with preferred stock for Young?
A) 8.72
B) 9.48
C) 8.76
D) 8.00
Alishas Travel Tours expects to sell a new bond issue at its par value. The coupon rate is 10 7/8. Because issuance costs are so small, Alishas plans to ignore the impact of issuance costs on the after-tax cost.
What is the after-tax cost of these bonds if Alishas' marginal tax rate is 40?
A) 10.825
B) 4.35
C) 6.53
D) 15.225
Dou's Oriental Hotels, Incorporated sold an issue of 10-year bonds. The bonds sold at 995 each. After issuance costs, Dou's Oriental Hotels received 985 each. The maturity value is 1,000 each and the coupon rate is 7 5/8 and paid annually.
What is the after-tax cost of debt for these bonds if Dou's Oriental Hotels' marginal tax rate is 40?
A) 7.70
B) 4.62
C) 7.85
D) 4.71
Quick Reply
