COST OF CAPITAL QUESTIONS 1. The risk free rate of return is 2.5% and the market risk premium is 8%. Rogue Transport has a beta of 2.2 and a standard deviation of returns of 28%. Rogue Transport's marginal tax rate is 35%. Analysts expect Rogue Transport's dividends to grow by 6% per year for the foreseeable future. Using the capital asset pricing model, what is Rogue Transport's cost of retained earnings? A) 16.4% B) 17.7% C) 19.6% D) 20.1% 2. Meacham Corp. wants to issue bonds with a 9% coupon rate, a face value of $1,000, and 12 years to maturity. Meacham estimates that the bonds will sell for $1,090 and that flotation costs will equal $15 per bond. Meacham Corp. common stock currently sells for $30 per share. Meacham can sell additional shares by incurring flotation costs of $3 per share. Meacham paid a dividend yesterday of $4.00 per share and expects the dividend to grow at a constant rate of 5% per year. Meacham also expects to have $12 million of retained earnings available for use in capital budgeting projects during the coming year. Meacham's capital structure is 40% debt and 60% common equity. Meacham's marginal tax rate is 35%. a.Calculate the after-tax cost of debt assuming Meacham's bonds are its only debt. b.Calculate the cost of retained earnings. c.Calculate the cost of new common stock. d.Calculate the weighted average cost of capital assuming Meacham's total capital budget is $30 million. 3. Baxter Inc. has a target capital structure of 30% debt, 15% preferred stock, and 55% common equity. The company's after-tax cost of debt is 7%, its cost of preferred stock is 11%, its cost of retained earnings is 15%, and its cost of new common stock is 16%. The company stock has a beta of 1.5 and the company's marginal tax rate is 35%. What is the company's weighted average cost of capital if retained earnings are used to fund the common equity portion? A) 11.20% B) 12.00% C) 13.80% D) 14.45% 4. GHJ Inc. is investing in a major capital budgeting project that will require the expenditure of $16 million. The money will be raised by issuing $2 million of bonds, $4 million of preferred stock, and $10 million of new common stock. The company estimates is after-tax cost of debt to be 7%, its cost of preferred stock to be 9%, the cost of retained earnings to be 14%, and the cost of new common stock to be 17%. What is the weighted average cost of capital for this project? A) 12.20% B) 13.12% C) 13.75% D) 14.23% 5. Beauty Inc. plans to maintain its optimal capital structure of 40 percent debt, 10 percent preferred stock, and 50 percent common equity indefinitely. The required return on each component source of capital is as follows: debt--8 percent; preferred stock--12 percent; common equity--16 percent. Assuming a 40 percent marginal tax rate, what after-tax rate of return must the firm earn on its investments if the value of the firm is to remain unchanged? A) 12.40 percent B) 12.00 percent C) 11.12 percent D) 10.64 percent 4 . For a typical corporation, which of the following capital structures will result in the lowest weighted average cost of capital? A) 40% debt, 20% preferred stock, 40% common equity B) 50% debt, 10% preferred stock, 40% common equity C) 60% debt, 10% preferred stock, 30% common equity D) 60% debt, 15% preferred stock, 25% common equity 5. Which of the following causes a firm's cost of capital (WACC) to differ from an investor's required rate of return on the company's common stock? A) the fact that the risk free rate of interest has increased B) the incurrence of flotation costs when new securities are issued C) The market risk premium exceeds 12%. D) None of the above the WACC and required return are the same. 6. Which of the following should NOT be considered when calculating a firm's WACC? A) after-tax YTM on a firm's bonds B) after-tax cost of accounts payable C) cost of newly issued preferred stock D) cost of newly issued common stock 7. The cost of retained earnings is less than the cost of new common stock because A) marginal tax brackets increase. B) flotation costs are incurred when new stock is issued. C) dividends are not tax deductible. D) accounting rules allow a deduction when using retained earnings. 8. Which of the following statements is MOST correct? A) Because the cost of debt is lower than the cost of equity, value-maximizing firms maintain debt ratios of close to 100%. B) Corporations that are 100% equity financed will have a much lower weighted average cost of capital because the lack of debt lowers their risk of bankruptcy. C) The source of capital with the lowest after-tax cost is preferred stock, because it is a hybrid security, part debt and part equity. D) The cost of a particular source of capital is equal to the investor's required rate of return after adjusting for the effects of both flotation costs and corporate taxes. 9. All else equal, an increase in beta results in A) an increase in the cost of retained earnings. B) an increase in the cost of newly issued common stock . C) an increase in the after-tax cost of debt. D) an increase in the cost of common equity, whether or not the funds come from retained earnings or newly issued common stock. 10. A firm's weighted average cost of capital is determined using all of the following inputs EXCEPT A) the firm's capital structure. B) the amount of capital necessary to make the investment. C) the firm's after tax cost of debt. D) the probability distribution of expected returns

Do not use Excel. 

please write the formulas first and then solve the questions.