1.

The following data are related to CVT stock:

Required return on CVT common
Beta Coefficient
The required market return
The required market return is
a. 13.0 percent
b. 18.0 percent

15 percent
1.5
9.0
c. 25.0 percent
d. 16.0 percent

2. Burger Queen issued P100 par value preferred stock 12 years ago. The stock provided
a 9 percent yield at the time of issue. The preferred stock is now selling for P72. The
company is subject to 40 percent tax rate. What is the current cost of the preferred
stock?
a. 9.0 percent
c. 5.4 percent
b. 12.5 percent
d. 7.5 percent
3. Given the following information, calculate the weighted average cost of capital for
DigiPrint, Inc?
Percent of capital structure:
Preferred stock
15%
Common equity
40%
Debt
45%
Additional information:
Corporate tax rate
Dividend, preferred
Dividend expected, common
Price, preferred
Growth rate
Bond yield
Flotation cost, preferred
Price, common

34%
P8.50
P2.50
P105.00
7.0%
9.5%
P3.60
P75.00

a. 8.2%
b. 8.3%

c. 8.9%
d. 9.7%

4. A firm has common stock with a prevailing market price of P100 per share. New issue
of stock is expected to be sold for P98, with P2 share representing the under-pricing
necessary in the competitive capital market. Flotation costs are expected to total P1 per
share. The dividends paid on the outstanding stock over the past five years are as
follows:
Year
Dividend
1
P 4.00
2
4.28
3
4.58
4
4.90
5
5.24
The cost of the firms new common stock equity is
a. 5.8%
c. 10.8%
b. 7.7%
d. 12.8%
5. Francisco Corporation is preparing to issue common stock. The Chief Financial Officer (CFO) is
attempting to estimate Francisco Corporations cost of new common stock. The next dividend is
expected to be P4.25 and will be paid one year from now. The current market price reflects an 18%
expected annual return on investors. Dividends are expected to grow at a constant 8% per year.
Flotation costs on the new issue will be P1.25 per share. Franciscos cost of new common stock is
nearest
a. 18%
c. 19.25%
1

b. 18.3%

d. 19.44%

6. The Roberto Corporation currently has earnings that are P4 per share. In recent years, earnings have
been growing at a rate of P7.5% and this rate is expected to continue in the future. If Roberto
Corporation has a retention ratio of 40% and a required rate of return of 14 %, what is its current
value?
a. P39.69
c. P26.46
b. P36.92
d. P24.62
7. Jocelyn Corporations P1,000 bonds that pay a coupon rate of 8% in a single annual payment and
mature in 1o years are selling for a current market price of P1,050. The corporate tax bracket rate
is effectively 40%. Using approximately yield-to-maturity (YTM) rates based on 50-50, what is the
relevant after-tax cost of debt to be used in the computation of Jocelyn Corporations cost of capital?
a. 7.56%
c. 4.39%
b. 7.32%
d. 2.93%
8. Joey Inc.s stock is expected to generate a dividend and terminal value a year from now of P57.00.
The stock has a beta of 1.3, the risk-free interest rate of 6%, and the expected market return is 11%.
What should be the equilibrium price of the Joeys stock in the market now?
a. P43.87
c. P51.35
b. P50.67
d. P53.77
9. Given the following information for the stock of Emma Company, calculate its beta.
Current price per share of common: P50.00
Expected dividend per share next year: P3.00
Constant annual dividend growth rate: 9%
Risk-free rate of return: 7%
Return on market portfolio: 10%
a. 2.67
b. 1.67

c. 1.50
d. 1.33

10. A firm maintains a debt-equity ration of 1.0. The debt consists of bonds with a before tax cost of
9%. The equity consists of ordinary shares with a cost of 18%. The tax rate is 40%. What is the
WACC?
a. 8.1%
c. 10.8%
b. 9.9%
d. 11.7%
11. The current market price of Rex Company stock is P80 per share and its price-earning ratio is 8 to
1. A P4 annual dividend was just paid to current shareholders. If dividends and earnings are
expected to grow at a constant rate of 12%, Rex Companys cost of retained earnings is
a. 50%
c. 17.0%
b. 17.6%
d. 12.5%
12. The MNO Company believes that it can sell long-term bonds with a 6% coupon, but a price that
gives a yield to maturity of 9%. If such bonds are part of next years financing plans, which of the
following should be used for bonds in their after tax (40% rate) cost of capital calculation?
a. 3.6%
c. 4.2%
b. 5.4 %
d. 6.0%
13. The KLM Company sold 12%, non-convertible preferred stock with a par value of P50. The stock
sold for P55, and flotation costs were 6% of the market price. Tax rate is 30%. What is KLMs
cost of preferred stock for cost of capital computation?
a. 11.61%
c. 8.12%
b. 10.91%
d. 7.64%
14. A firm is expected to pay a dividend of P5.00 per share this year. Dividend is expected to grow at
a rate of 6%. If the current market price of the stock is P60 per share, what is the estimated cost of
equity?
2

a. 6%
b. 8.3%

c. 12%
d. 14.3%

15. If DEF Corporation carries no debt in its capital structure. Its beta is 0.8. The risk free rate is 9%
and the expected return on the market is 15%. The company has an opportunity to invest in a
project that earns 12%. What is DEFs cost of capital?
a. 4.8%
c. 12%
b. 9%
d. 13.8%
16. XYC Companys cost of equity is 18%, its before cost of debt is 8%, and its corporate tax rate is
40% percent. Given the following balance sheet, calculate the after-tax weighted average cost of
capital.
ASSETS
LIABILITIES & EQUITY
Cash
P 100
Accounts payable
P 200
Accounts receivable
400
Accrued taxes due
200
Inventories
2,000
Long-term debt
400
Plant and equipment
1,300
Equity
1,200
P 2,000
P2,000
a. 16.8%
b. 14.7%

c. 10.3%
d. 9.7%

17. Apple Corporation is engaged in the call center business. A boom in this type of business has
caused Apple Corporations management to consider expanding its operations by opening more
call centers in key cities all over the country. The planned expansion project requires an investment
of P240,000,000, a 100% increase in the corporations present capital structure. Management is
considering three financing alternatives:
Alternative 1- Debt and equity financing
Float bonds with 10% interest rate, expected proceeds of P72,000,000, net of flotation cost.
Issue 8% preferred stocks, expected proceeds of P48,000,000 net of P2,000,000 flotation
cost.
Issue common stocks, expected proceeds of P120,000,000, net of 6% flotation costs.
Alternative 2- Debt financing
Float bonds with 12% interest rate. Expected proceeds P240,000,000, net of flotation costs.
Alternative 3- Equity financing
Issue common stocks, expected proceeds, P240,000,000, net of 5% flotation costs.
The companys capital structure is composed of 30% bonds, 20% preferred stocks, and 50%
common stocks.
The common stocks currently sell for P50 per share. For the past 2 years, common stock dividends
amounted toP5 per share. The expected dividend growth rate is 4%. Apple Corporation pays
income tax at the rate of 30%.
Question-1: What is the weighted average cost of capital for Apple Corporations first financing
alternative?
a. 11.30%
c. 15.06%
b. 30.19%
d. 6.80%
Question-2: What is the weighted average cost of capital for Apple Corporations second financing
alternative, assuming that the costs of preferred stocks and common stocks are 8.5%
and 15% respectively?
a. 31.66%
c. 10.06%
b. 8.16%
d. 11.65%
Question-3: What is the weighted average cost of capital for Apple Corporations alternative 3,
assuming that cost of bonds and preferred stocks are 6.8% and 8.33%, respectively?
a. 30.08%
c. 11.21%
3

b. 13.06%

d. 11.19%

18. Ayie Corporation is considering a project for the coming year that will require an investment cost
of P100,000,000. The company plans to finance the project by a combination of debt and equity,
as follows:
Issue P20,000,000 of 10-year bonds at a price of 102, with an interest rate of 10%, and
flotation cost of 3% of par.
Use P80,000,000 of funds generated from earnings retained in the business.
The expected market rate of return is 14%. The current rate of Treasury bills is 8%. The beta
coefficient for Ayie Corporation is 1.2. The corporate income tax rate is 30%.
Question-1: What is the effective rate of interest of the bonds?
a. 10%
c. 10.20%
b. 9.89%
d. 10.10%
Question-2: What is the after-tax effective cost of bonds?
a. 6.80%
c. 6.73%
b. 7.07%
d. 6.94%
Question-3: Using the capital asset pricing model (CAPM), what is the cost of equity capital for
Ayie Corporation?
a. 9.6%
c. 15.20%
b. 10.34%
d. 7.2%
Question-4: Assume that the after-tax cost of debt is 7% and the cost of equity capital is 15%,
what is the weighted average cost of capital for Ayie Corporations project?
a. 13.40%
c. 13.53%
b. 22%
d. 14.9%
19. At the end of 200A, Tanya Corporation had the following capital structure considered to be optimal
(in million of peso):
Amount
%
Debt (10% coupon bonds)
P42.00
25%
16% preferred stocks, P100 par value
25.20
15%
Common stocks and retained earnings
100.80
60%
The management of Tanya Corporation is planning to increase its productive capacity. This plan
will require acquisition of additional facilities that calls for a substantial amount of capital
expenditures. Tanya is considering four investment alternatives:
Amount
Investment Required
Rate of return
Alternative A
P300,000,000
14.80%
Alternative B
300,000,000
15.20%
Alternative C
300,000,000
15.50%
Alternative D
300,000,000
16.00%
Preferred stocks may be issued at par.
Common stock has a par value of P10 and is selling for P42 per share, net of P3 per share flotation
cost. The company has had 8% dividend yield and a growth rate of 95% per year.
Retained earnings as of the end of 200A amount to P58,800,000.
The 10% yield on bonds is applicable to a maximum of P70,000,000 bonds. Additional debt will
require a 4% premium and be sold to yield 14%.
The corporate tax rate is 40%.
Question-1: The cost of retained earnings and common stocks are
Retained earnings
Common stocks
a.
8%
9%
b.
5.44%
25%
c.
17.72%
18.34%
4

d.
18.34%
17.72%
Question-2: What is the cost of preferred stocks?
a. 10.88%
c. 16%
b. 5.12%
d. P16
Question-3: The weighted-average cost of capital as of the end of 200A is
a. 14.78%
c. 17.72%
b. 18.34%
d. 15.15%
Question-4: What is the retained earnings breakpoint?
a. P58.8M
c. P100.8M
b. P98.0M
d. P35.28M
Question-5: What is the average cost of capital beyond the retained earnings breakpoint?
a. 14.78%
c. 17.72%
b. 18.34%
d. 15.15%
Question-6: What is the debt breakpoint?
a. P70M
c. P280M
b. P42M
d. P 28M