Question
Cost of capitalEdna Recording Studios, Inc., reported earnings available to common stock of $4,000,000 last year. From those earnings, the company paid a dividend of
Cost of capitalEdna Recording Studios, Inc., reported earnings available to common stock of $4,000,000 last year. From those earnings, the company paid a dividend of $1.17 on each of its 1,000,000common shares outstanding. The capital structure of the company includes 40% debt, 20% preferred stock, and 40% common stock. It is taxed at a rate of 27%
The company can issue $1,000-par-value, 8% coupon, 11-year bonds that can be sold for $1,180 each. Flotation costs would amount to $20
per bond. Use the estimation formula to figure the approximate after-tax cost of debt financing?
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