Question
Consider the following capital structure for ABC Corporation. The company has a floating-rate bank loan, preferred shares, and common equity in its capital structure. The
Consider the following capital structure for ABC Corporation. The company has a floating-rate bank loan, preferred shares, and common equity in its capital structure. The firms tax rate is 35%. The risk-free rate is 4%.
Details on the components of the capital structure are listed below.
Debt: | Short-term, variable-rate bank loan |
$120 million par | |
Remaining maturity of 2 years | |
Bonds rate was recently reset to market yield of 5%; | |
So, now priced at par (market value = $120 million) | |
Preferred equity: | $100 million par |
8% annual coupon | |
Each $1,000 par issue is currently priced at $1,050. | |
Common equity: | 5 million shares outstanding |
Current share price: $50 | |
Stock beta: 1.2 | |
Market risk premium = 8.5% |
What is ABCs cost of preferred equity?
A) 7.62%
B) 8.00%
C) 8.40%
D) 12.00%
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