1. If the cost of new common equity is higher than the cost of internal equity, why would a firm choose to issue new common stock?
2. Calculate all MCC break points for the following information:
Total assets = $1,500,000
Total debt = $600,000
Total equity = $900,000
kd is 10% up to $500,000; 11% after $500,000
ks is 13% up to $100,000; 14% after $100,000
3. Your firm’s ks is 10%, the cost of debt is 6% before taxes, and the tax rate is 40%. Given the following balance sheet, calculate the firm’s after tax WACC:
Total assets = $25,000
Total debt = $15,000
Total equity = $10,000
4. Explain the difference between WACC and MCC.
5. What determines whether to use the dividend growth model approach or the CAPM approach to calculate the cost of equity?