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Exam 13: The Weighted-Average Cost of Capital and Company Valuation

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Question 61

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Interest tax shields are available to the firm on debt and preferred stock but not on common equity.

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Question 62

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If a project has a zero NPV when the expected cash flows are discounted at the weighted-average cost of capital, then the project's cash flows are just sufficient to give debtholders and shareholders the return they require.

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Question 63

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XYZ Company issues common stock at a price of $25 a share. The firm expects to pay a dividend of $2.20 a share next year. If the dividend is expected to grow at 2.5% annually, what is XYZ's cost of common equity?

Calculate a firm's WACC given that the total value of the firm is $2 million, $600,000 of which is debt, the pre-tax cost of debt is 10%, and the cost of equity is 15%. The firm pays no taxes.

The company cost of capital is the return that is expected on a portfolio of the company's:

Can WACC ever be used to value an entire business?

For a company that pays no corporate taxes, its WACC will be equal to:

Al's Market plans to close after 3 more years. The firm expects to have free cash flows of $148,000 next year, $128,000 in Year 2, and $65,000 in Year 3 after incurring the costs of closing. The firm's cost of equity is 15.5% and its cost of debt is 6.2%. What is the present value of the firm if its debt to value ratio is 30%?

What happens when the capital structure of a firm changes?

What would you estimate as the cost of equity if a stock sells for $40, pays a $4.25 dividend, and is expected to grow at a constant rate of 5%?

When using the WACC as a discount rate, it is often adjusted upward for riskier projects and downward for safer projects.

A firm's cost of capital should be used as the discount rate for every new project the firm considers.

A proposed capital project will cost $20 million and generate $4 million annually in after-tax cash flows for 10 years. The cost of capital for a project of this risk level is 12.2%. Should the project be accepted? Why or why not?