Management of Cost of Capital

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Q No.1(a)

Reactive Industries has the following capital structure. Its corporate tax rare is 35 percent. What

is its WACC?

Security Market value required return

Debt $ 20 million 6%

Preferred stock 10 8%

Common stock 50 12%

Q No.1(b)

Take data from question 1 above

Calculate cost of capital if company want to change capital structure debt:40%, preferred stock

10% and stock 50%. Should company change or not give reason

Q No.2

A company has issued 10 year bond a year ago at par value with a coupon rate of 9%, paid

annually. Today the bond is selling at 1150. Firm is in the tax bracket of 40%. Company has

preferred stock on which dividend is fixed $ 4 and market price of preferred stock is $ 45.

Company issued common stock, dividend currently paid $2 which is expected to grow at a rate

of 4% and stock is selling at $ 25. If company is planning to invest in a project at a ratio of

40:20:40. What should be weighted average cost of capital of this project?

Q No.3

Find the WACC of Naveed Computers. The total book value of the firm’s equity is $12 million;

book value per share is $22. The stocks sell for a price of $32 per share, and the cost of equity is

16 percent. The firm’s bonds have a face value of $6 million and sell at a price of 110 percent of

face value. The yield to maturity on the bond is 9 percent, and the firm’s tax rate is 40 percent.

Q No.4(a)

Reactive Industries has the following capital structure. Its corporate tax rare is 35 percent. What

is its WACC?

Security Market value required return

Debt $ 30 million 8%

Preferred stock 15 12%

Common stock 65 15%

Q No.4(b)

Take data from question 1 above

Calculate cost of capital if company want to change capital structure debt:40%, preferred stock

10% and stock 50%. Should company change or not give reason

Q No.5

A company has issued 10 year bond a year ago at par value with a coupon rate of 9%, paid

annually. Today the bond is selling at 850. Firms is in the tax bracket of 40%. Company has

preferred stock on which dividend is fixed $ 4 and market price of preferred stock is $ 45.

Company issued common stock, dividend currently paid $3 which is expected to grow at a rate

of 6% and stock is selling at $ 45. If company is planning to invest in a project at a ratio of

50:10:40. What should be weighted average cost of capital of this project?

Q No.6

Find the WACC of Naveed Computers. The total book value of the firm’s equity is $12 million;

book value per share is $22. The stocks sell for a price of $32 per share, and the cost of equity is

16 percent. The firm’s bonds have a face value of $6 million and sell at a price of 110 percent of

face value. The yield to maturity on the bond is 9 percent, and the firm’s tax rate is 40 percent.

Q No.7

The following tabulation gives earnings per share figures for Exxon manufacturing during the

preceding 10 years. The firm’s common stock, 140,000 shares outstanding, is now selling for

Rs.50 a share, and the expected dividend for the coming year i.e. 2002 is 50 percent of EPS for

the year. Investors expect past trends to continue, so g may be based on the historical earnings

growth rate.

Year EPS

1992 Rs.2

1993 2.16

1994 2.33

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Q No.1(a) Reactive Industries has the following capital structure. Its corporate tax rare is 35 percent. What is its WACC? Security Market value required return Debt $ 20 million 6% Preferred stock 10 8% Common stock 50 12% Q No.1(b) Take data from question 1 above Calculate cost of capital if company want to change capital structure debt:40%, preferred stock 10% and stock 50%. Should company change or not give reason Q No.2 A company has issued 10 year bond a year ago at par value with a coupon rate of 9%, paid annually. Today the bond is selling at 1150. Firm is in the tax bracket of 40%. Company has preferred stock on which dividend is fixed $ 4 and market price of preferred stock is $ 45. Company issued common stock, dividend currently paid $2 which is expected to grow at a rate of 4% and stock is selling at $ 25. If company is planning to invest in a project at a ratio of 40:20:40. What should be weighted average cost of capital of this project? Q No.3 Find the WACC of Naveed Computers. The total book value of the firm’s equity is $12 million; book value per share is $22. The stocks sell for a price of $32 per share, and the cost ...
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