The cost of each of the capital components. Introduction: Cost of Capital: In any company there is a need of fund for various purposes. The companies raise capital through various sources such as equity, debt, and preferred stock . The cost of capital is the total cost of raising capital. It consists of cost of debt, cost of equity , and cost of the preferred stock. After-Tax Cost of Debt: It can be defined as relevant cost of new debt considering tax deductibility in interest. It is the cost of debt after tax savings. The interest on the debt is tax deductible. The tax can be saved on the interest paid on the debt. It is used to calculate the weighted average cost of capital. Cost of Preferred Stock: The return earned by the firm’s preferred stockholders from the investment in preferred stock is a cost of the preferred stock. It is computed by dividing the dividend received on preferred stock by the current price of the preferred stock. Cost of Equity: It is the cost of the company while raising finance by issuing equity. It is the earnings from the investment to the firm’s equity investors. It is the return to the stockholders’ equity investments. The issue of new stock incurs the flotation cost.

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Answer 1

Question

Chapter 10, Problem 18P

a.

Summary Introduction

To determine: The cost of each of the capital components.

Introduction:

Cost of Capital:

In any company there is a need of fund for various purposes. The companies raise capital through various sources such as equity, debt, and preferred stock. The cost of capital is the total cost of raising capital. It consists of cost of debt, cost of equity, and cost of the preferred stock.

After-Tax Cost of Debt:

It can be defined as relevant cost of new debt considering tax deductibility in interest. It is the cost of debt after tax savings. The interest on the debt is tax deductible. The tax can be saved on the interest paid on the debt. It is used to calculate the weighted average cost of capital.

Cost of Preferred Stock:

The return earned by the firm’s preferred stockholders from the investment in preferred stock is a cost of the preferred stock. It is computed by dividing the dividend received on preferred stock by the current price of the preferred stock.

Cost of Equity:

It is the cost of the company while raising finance by issuing equity. It is the earnings from the investment to the firm’s equity investors. It is the return to the stockholders’ equity investments. The issue of new stock incurs the flotation cost.

b.

Summary Introduction

To determine: WACC of A Corporation.

Introduction:

Weighted Average Cost of Capital:

It is the weighted average cost of capital of all the sources through which a firm finances its capital. It is the rate that a company will pay to all for raising finance. It can be termed as firm’s cost of capital. The company raises money through various sources such as common stock and preference share debt. The WACC is computed by taking the relative weight of each item of capital structure.

c.

Summary Introduction

To identify: The projects that should be accepted by A Corporation. If only the project with expected returns more than WACC should be accepted.

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WACC AND OPTIMAL CAPITAL BUDGET Adamson Corporation is considering four average-risk projects with the following costs and rates of return: Project Cost Expected Rate of Return 1 $2,000 16.00% 2 3,000 15.00 3 5,000 13.75 4 2,000 12.50 The company estimates that it can issue debt at a rate of rd = 9%, and its tax rate is 40%. It can issue preferred stock that pays a constant dividend of $6 per year at $59 per share. Also, its common stock currently sells for $40 per share; the next expected dividend, D1, is $4.00; and the dividend is expected to grow at a constant rate of 7% per year. The target capital structure consists of 75% common stock, 15% debt, and 10% preferred stock. What is the cost of each of the capital components? Round your answers to two decimal places. Do not round your intermediate calculations.Cost of debt %Cost of preferred stock %Cost of retained earnings % What is Adamson's WACC? Round your answer to two decimal places. Do not round…

Adamson Corporation is considering four average-risk projects with the following costs and rates of return: Expected Rate of Return TE Project Cost 1 $2,000 16.00% 2 3,000 15.00 5,000 13.75 4 2,000 12.50 The company estimates that it can issue debt at a rate of ra = 9%, and its tax rate is 25%. It can issue preferred stock that pays a constant dividend of $7.00 per year at $56.00 per share. Also, its common stock currently sells for $41.00 per share; the next expected dividend, D1, is $4.25; and the dividend is expected to grow at a constant rate of 6% per year. The target capital structure consists of 75% common stock, 15% debt, and 10% preferred stock. a. What is the cost of each of the capital components? Do not round intermediate calculations. Round your answers to two decimal places. Cost of debt: % Cost of preferred stock: % Cost of retained earnings: % b. What is Adamson's WACC? Do not round intermediate calculations. Round your answer to two decimal places. % c. Only projects…

Adamson Corporation is considering four average-risk projects with the following costs and rates of return: Project Cost Expected Rate of Return 1 $2,000 16.00% 2 3,000 15.00 3 5,000 13.75 4 2,000 12.50 The company estimates that it can issue debt at a rate of rd = 10%, and its tax rate is 25%. It can issue preferred stock that pays a constant dividend of $6.00 per year at $56.00 per share. Also, its common stock currently sells for $43.00 per share; the next expected dividend, D1, is $3.75; and the dividend is expected to grow at a constant rate of 7% per year. The target capital structure consists of 75% common stock, 15% debt, and 10% preferred stock. What is the cost of each of the capital components? Do not round intermediate calculations. Round your answers to two decimal places. Cost of debt: % Cost of preferred stock: % Cost of retained earnings: % What is Adamson's WACC? Do not round intermediate calculations. Round your answer to…

Answer 2

Question

Chapter 10, Problem 18P

a.

Summary Introduction

To determine: The cost of each of the capital components.

Introduction:

Cost of Capital:

In any company there is a need of fund for various purposes. The companies raise capital through various sources such as equity, debt, and preferred stock. The cost of capital is the total cost of raising capital. It consists of cost of debt, cost of equity, and cost of the preferred stock.

After-Tax Cost of Debt:

It can be defined as relevant cost of new debt considering tax deductibility in interest. It is the cost of debt after tax savings. The interest on the debt is tax deductible. The tax can be saved on the interest paid on the debt. It is used to calculate the weighted average cost of capital.

Cost of Preferred Stock:

The return earned by the firm’s preferred stockholders from the investment in preferred stock is a cost of the preferred stock. It is computed by dividing the dividend received on preferred stock by the current price of the preferred stock.

Cost of Equity:

It is the cost of the company while raising finance by issuing equity. It is the earnings from the investment to the firm’s equity investors. It is the return to the stockholders’ equity investments. The issue of new stock incurs the flotation cost.

b.

Summary Introduction

To determine: WACC of A Corporation.

Introduction:

Weighted Average Cost of Capital:

It is the weighted average cost of capital of all the sources through which a firm finances its capital. It is the rate that a company will pay to all for raising finance. It can be termed as firm’s cost of capital. The company raises money through various sources such as common stock and preference share debt. The WACC is computed by taking the relative weight of each item of capital structure.

c.

Summary Introduction

To identify: The projects that should be accepted by A Corporation. If only the project with expected returns more than WACC should be accepted.

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Answer 3

Question

Chapter 10, Problem 18P

a.

Summary Introduction

To determine: The cost of each of the capital components.

Introduction:

Cost of Capital:

In any company there is a need of fund for various purposes. The companies raise capital through various sources such as equity, debt, and preferred stock. The cost of capital is the total cost of raising capital. It consists of cost of debt, cost of equity, and cost of the preferred stock.

After-Tax Cost of Debt:

It can be defined as relevant cost of new debt considering tax deductibility in interest. It is the cost of debt after tax savings. The interest on the debt is tax deductible. The tax can be saved on the interest paid on the debt. It is used to calculate the weighted average cost of capital.

Cost of Preferred Stock:

The return earned by the firm’s preferred stockholders from the investment in preferred stock is a cost of the preferred stock. It is computed by dividing the dividend received on preferred stock by the current price of the preferred stock.

Cost of Equity:

It is the cost of the company while raising finance by issuing equity. It is the earnings from the investment to the firm’s equity investors. It is the return to the stockholders’ equity investments. The issue of new stock incurs the flotation cost.

b.

Summary Introduction

To determine: WACC of A Corporation.

Introduction:

Weighted Average Cost of Capital:

It is the weighted average cost of capital of all the sources through which a firm finances its capital. It is the rate that a company will pay to all for raising finance. It can be termed as firm’s cost of capital. The company raises money through various sources such as common stock and preference share debt. The WACC is computed by taking the relative weight of each item of capital structure.

c.

Summary Introduction

To identify: The projects that should be accepted by A Corporation. If only the project with expected returns more than WACC should be accepted.

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Answer 4

Question

Chapter 10, Problem 18P

a.

Summary Introduction

To determine: The cost of each of the capital components.

Introduction:

Cost of Capital:

In any company there is a need of fund for various purposes. The companies raise capital through various sources such as equity, debt, and preferred stock. The cost of capital is the total cost of raising capital. It consists of cost of debt, cost of equity, and cost of the preferred stock.

After-Tax Cost of Debt:

It can be defined as relevant cost of new debt considering tax deductibility in interest. It is the cost of debt after tax savings. The interest on the debt is tax deductible. The tax can be saved on the interest paid on the debt. It is used to calculate the weighted average cost of capital.

Cost of Preferred Stock:

The return earned by the firm’s preferred stockholders from the investment in preferred stock is a cost of the preferred stock. It is computed by dividing the dividend received on preferred stock by the current price of the preferred stock.

Cost of Equity:

It is the cost of the company while raising finance by issuing equity. It is the earnings from the investment to the firm’s equity investors. It is the return to the stockholders’ equity investments. The issue of new stock incurs the flotation cost.

b.

Summary Introduction

To determine: WACC of A Corporation.

Introduction:

Weighted Average Cost of Capital:

It is the weighted average cost of capital of all the sources through which a firm finances its capital. It is the rate that a company will pay to all for raising finance. It can be termed as firm’s cost of capital. The company raises money through various sources such as common stock and preference share debt. The WACC is computed by taking the relative weight of each item of capital structure.

c.

Summary Introduction

To identify: The projects that should be accepted by A Corporation. If only the project with expected returns more than WACC should be accepted.

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Answer 5

Chapter 10, Problem 18P

a.

Summary Introduction

To determine: The cost of each of the capital components.

Introduction:

Cost of Capital:

In any company there is a need of fund for various purposes. The companies raise capital through various sources such as equity, debt, and preferred stock. The cost of capital is the total cost of raising capital. It consists of cost of debt, cost of equity, and cost of the preferred stock.

After-Tax Cost of Debt:

It can be defined as relevant cost of new debt considering tax deductibility in interest. It is the cost of debt after tax savings. The interest on the debt is tax deductible. The tax can be saved on the interest paid on the debt. It is used to calculate the weighted average cost of capital.

Cost of Preferred Stock:

The return earned by the firm’s preferred stockholders from the investment in preferred stock is a cost of the preferred stock. It is computed by dividing the dividend received on preferred stock by the current price of the preferred stock.

Cost of Equity:

It is the cost of the company while raising finance by issuing equity. It is the earnings from the investment to the firm’s equity investors. It is the return to the stockholders’ equity investments. The issue of new stock incurs the flotation cost.

b.

Summary Introduction

To determine: WACC of A Corporation.

Introduction:

Weighted Average Cost of Capital:

It is the weighted average cost of capital of all the sources through which a firm finances its capital. It is the rate that a company will pay to all for raising finance. It can be termed as firm’s cost of capital. The company raises money through various sources such as common stock and preference share debt. The WACC is computed by taking the relative weight of each item of capital structure.

c.

Summary Introduction

To identify: The projects that should be accepted by A Corporation. If only the project with expected returns more than WACC should be accepted.

Answer 6

Chapter 10, Problem 18P

a.

Summary Introduction

To determine: The cost of each of the capital components.

Introduction:

Cost of Capital:

In any company there is a need of fund for various purposes. The companies raise capital through various sources such as equity, debt, and preferred stock. The cost of capital is the total cost of raising capital. It consists of cost of debt, cost of equity, and cost of the preferred stock.

After-Tax Cost of Debt:

It can be defined as relevant cost of new debt considering tax deductibility in interest. It is the cost of debt after tax savings. The interest on the debt is tax deductible. The tax can be saved on the interest paid on the debt. It is used to calculate the weighted average cost of capital.

Cost of Preferred Stock:

The return earned by the firm’s preferred stockholders from the investment in preferred stock is a cost of the preferred stock. It is computed by dividing the dividend received on preferred stock by the current price of the preferred stock.

Cost of Equity:

It is the cost of the company while raising finance by issuing equity. It is the earnings from the investment to the firm’s equity investors. It is the return to the stockholders’ equity investments. The issue of new stock incurs the flotation cost.

Answer 7

Chapter 10, Problem 18P

a.

Summary Introduction

To determine: The cost of each of the capital components.

Introduction:

Cost of Capital:

In any company there is a need of fund for various purposes. The companies raise capital through various sources such as equity, debt, and preferred stock. The cost of capital is the total cost of raising capital. It consists of cost of debt, cost of equity, and cost of the preferred stock.

After-Tax Cost of Debt:

It can be defined as relevant cost of new debt considering tax deductibility in interest. It is the cost of debt after tax savings. The interest on the debt is tax deductible. The tax can be saved on the interest paid on the debt. It is used to calculate the weighted average cost of capital.

Cost of Preferred Stock:

The return earned by the firm’s preferred stockholders from the investment in preferred stock is a cost of the preferred stock. It is computed by dividing the dividend received on preferred stock by the current price of the preferred stock.

Cost of Equity:

It is the cost of the company while raising finance by issuing equity. It is the earnings from the investment to the firm’s equity investors. It is the return to the stockholders’ equity investments. The issue of new stock incurs the flotation cost.

Answer 8

b.

Summary Introduction

To determine: WACC of A Corporation.

Introduction:

Weighted Average Cost of Capital:

It is the weighted average cost of capital of all the sources through which a firm finances its capital. It is the rate that a company will pay to all for raising finance. It can be termed as firm’s cost of capital. The company raises money through various sources such as common stock and preference share debt. The WACC is computed by taking the relative weight of each item of capital structure.

Answer 9

b.

Summary Introduction

To determine: WACC of A Corporation.

Introduction:

Weighted Average Cost of Capital:

It is the weighted average cost of capital of all the sources through which a firm finances its capital. It is the rate that a company will pay to all for raising finance. It can be termed as firm’s cost of capital. The company raises money through various sources such as common stock and preference share debt. The WACC is computed by taking the relative weight of each item of capital structure.

Answer 10

c.

Summary Introduction

To identify: The projects that should be accepted by A Corporation. If only the project with expected returns more than WACC should be accepted.

Answer 11

c.

Summary Introduction

To identify: The projects that should be accepted by A Corporation. If only the project with expected returns more than WACC should be accepted.

Answer 12

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Answer 13

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Answer 14

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Answer 15

Ch. 10 - Prob. 1Q Ch. 10 - Assume that the risk-free rate increases, but the...Ch. 10 - How should the capital structure weights used to...Ch. 10 - Suppose a firm estimates its WACC to be 10%....Ch. 10 - The WACC is a weighted average of the costs of...Ch. 10 - AFTER-TAX COST OF DEBT The Holmes Companys...Ch. 10 - COST OF PREFERRED STOCK Torch Industries can issue...Ch. 10 - COST OF COMMON EQUITY Pearson Motors has a target...Ch. 10 - COST OF EQUITY WITH AND WITHOUT FLOTATION Jarett ...Ch. 10 - PROJECT SELECTION Midwest Water Works estimates...

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To identify: The projects that should be accepted by A Corporation. If only the project with expected returns more than WACC should be accepted.

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