FIN745: MANAGERIAL FINANCE Activity 7.1 Question 1 Tangshan Mining is considering issuing long-term debt. The debt would have a 30-year maturity and a 6 percent coupon rate and make semiannual coupon payments. In order to sell the issue, the bonds must be underpriced at a discount of 1 percent of face value. In addition, the firm would have to pay flotation costs of 1 percent of face value. The firm's tax rate is 21 percent. Given this information, the after-tax cost of debt for Tangshan Mining would be Question 2 A firm has a beta of 1.2. The market return equals 14 percent and the risk-free rate of return equals 6 percent. The estimated cost of common stock equity is: Question 3 A firm has common stock with a market price of $25 per share and an expected dividend of $2 per share at the end of the coming year. The growth rate in dividends has been 5 percent. The cost of the firm's common stock equity is: Question 4 What would be the cost of new common stock equity for Tangshan Mining if the firm just paid a dividend of $4.25, the stock price is $55.00, dividends are expected to grow at 8.5 percent indefinitely, and flotation costs are $6.25 per share? Question 5 A firm has issued 10 percent preferred stock, which sold for $100 per share par value. The cost of issuing and selling the stock was $2 per share. The firm's marginal tax rate is 40 percent. The cost of the preferred stock is: Question 6 Promo Pak has compiled the following financial data: Source of Capital Book Value Market Value Cost (%) Long-term debt 10,000,000 8,500,000 5 Preferred stock 1,000,000 1,500,000 14 Common stock equity 9,000,000 15,000,000 20 20,000,000 25,000,000 (a) Calculate the weighted average cost of capital using book value weights. (b) Calculate the weighted average cost of capital using market value weights