SOLVED

11) Ignoring costs associated with new issues, what is the cost of retained earnings the same as? A) The cost of debt, as creditors have first call on retained earnings at the company’s termination. B) The weighted average cost of all the company’s sources of capital as the company is indifferent as to the use of retained earnings or other sources. C) The return on total assets as this ratio is equal to the sum of retained earnings plus dividends divided by total assets. D) The cost of shares as retained earnings represent the undistributed profits belonging to the common shareholders. E) The return on capital employed as retained earnings represents the opportunity cost of investment. 12) Bellaire Pharma Ltee. refinances its $2.1 million worth of bonds as they come due at an annual rate of 6%. The current market value of the bonds is $920 for each $1000 bond. If the company’s tax rate is 25%, what is the cost of capital of the loan to Bellaire? A) 0.5% B) 1.6% C) 4.9% D) 6.5% E) 13.0% 13) Markle Ltd. has issued $7.5 million worth of bonds with an interest rate of 10%, payable annually, and redemption in 10 years. The issue price of the bond is $85 per $100 of nominal value. If Markle’s tax rate is 35%, what is the cash flow each year that is associated with this debt? A) Year 0 has an inflow of $7.5 million. Each of Years 1-19 have an outflow of $637,500 and Year 5 has an outflow of $8.14 million. B) Year 0 has an inflow of $7.5 million. Year 5 has an outflow of $9.94 million. C) Year 0 has an inflow of $6.38 million and Year 5 has an outflow of $11.25 million. D) Year 0 has an inflow of $6.38 million. Each of Years 2-9 has an outflow of $487,500. Year 10 is an outflow of $7.99 million. E) Year 0 has an inflow of $6.38 million. Each of Years 1-9 has an outflow of $750,000. Year 10 has an outflow of $8.25 million. 14) Omaro Ltd. has $34 million worth of bonds outstanding with an interest rate of 8% and redemption in 4 years. The issue price of the bond is $90 per $100 of nominal value. The company’s tax rate is 24%. Using trial values of 8% and 12%, what is the company’s after tax cost of capital for the bonds? A) 7.8% B) 8.6% C) 9.3% D) 11.3% E) 12.0% 15) A company has 1.5 million 5% preferred shares with a nominal value of $50 and a market capitalization of $91.5 million. What is the cost of capital for the preferred shares? A) 4.1% B) 7.5% C) 8.2% D) 10.0% E) 13.7% 16) Which of the following is a quality that applies to preferred shares but not to bonds? A) Can be redeemable or irredeemable. B) Have an agreed rate of return that is fixed over the life of the security. C) Have a rate of return that cannot be written off against taxes. D) Can be convertible or non-convertible. E) Can be traded in the secondary securities markets. 17) Galhadi Telecommunications Ltd has 15 million 7% preferred shares outstanding with a nominal value of $90, a market price of $80 and a term of five years. Galhadi has a tax rate of 31%. Using trial values of 5% and 10%, what is the company’s after-tax cost of preferred share capital? A) 5.2% B) 7.5% C) 8.0% D) 9.9% E) 12.8% 18) The capital structure for a particular project consists of $500,000 of retained earnings, a $2.5 million bank loan with a net after-tax cost of capital of 5.5%, $2.5 million of common shares with a cost of capital of 8.2%.What is the weighted average cost of capital (WACC) for the project? A) 4.5 B) 5.6 C) 6.4 D) 7.0 E) 7.3 19) I-polo International Inc. has a tax rate of 22% and a capital structure that includes five million common shares outstanding at a rate of $26.50 per share. Its expected dividend for next year is $2.25, the result of a constant rate of dividend growth of 2% per year. It has four million bonds with a face value of $1,000, a coupon rate of 9% and selling at a price of $840. What is the weighted average cost of capital (WACC)? A) 7.9%% B) 8.3% C) 8.5% D) 9.3% E) 10.4% 20) McDuffs’ Moving and Storage has a capital structure which includes 1.5 million common shares selling at $15.00 per share with a dividend of $1.70 and a growth in dividends of 1.1% per year. Its newly issued 300,000 preferred shares have an issue and market price of $50, a term of 5 years and a fixed dividend of $4.50. McDuffs’ nominal $40 million debt is perpetual with a interest rate of 7% and selling at $92 per $100 of nominal value. The company’s tax rate is 28%. Using trial values of 6% and 12%, what is the company’s weighted average cost of capital? A) 7.8 B) 8.3 C) 8.4 D) 9.0 E) 9.3