HOFFMAN Cost of Capital Problems

FIN 300

1. Builtrite is planning to issue new preferred stock. Currently, their

preferred stock is selling for $115; however, new preferred would

net the company $98 per share. The dividend is 8% based on a $100

par value. What is the cost of preferred stock?

2. Builtrites common stock is currently selling for $21.50. The past

dividend was $.70 and dividends and earnings are expected to grow at

an annual rate of 15%. Flotation costs are estimated at 10% of the

current market price of the common stock. What is the cost of retained

earnings?

3. Builtrite needs to raise $500,000 for a plant improvement. It plans to

sell $1000 par value bonds with a 14% coupon rate and a 10 year maturity.

Investors require a 9% rate of return.

a) Calculate the market value of the bonds.

b) What is the net price of the bonds if flotation costs are 10.5% of

the market price?

c) How many bonds will Builtrite need to sell to raise the $500,000?

d) What is the after-tax cost of debt when the tax rate is 34%?

4. Builtrite is issuing new common stock at a price of $27 per share. The

past dividend for common stock was $1.45 and dividends are expected to

grow at an annual rate of 6%. What is the cost of new equity?

5. Preferred stock is currently selling for $36 a share and pays a $2.50 dividend. Flotation costs are estimated at $3.50 per share. What is the cost

of preferred stock?

6. The common stock of Builtrite is selling for $58. If new shares are sold, the

flotation costs are estimated to be 8%. Builtrite pays half of its earnings as

dividends and a $4 dividend was recently paid. Earnings per share were $5

five years ago and are expected to grow at the same rate in the future.

The tax rate is 34%. What is the cost of new common stock and the cost of

retained earnings?

7. The target capital structure for Builtrite is 40% common stock, 10% preferred stock and 50% debt. If the cost of common is 18%, the cost of

preferred stock is 10% and the before tax cost of debt is 8% (the tax rate

is 34%), what is Builtrites weighted average cost of capital?

8. Builtrite has a capital structure of 40% common stock and 60% debt. Bonds

being sold will have a $1000 par, 6% coupon rate, a 15 year maturity with

a selling price of $975 and flotation costs of $15 per bond. Common stock

currently sells for $30 a share and the firms expects to pay a $2.25 dividend

next year. Dividends are expected to grow at a 5% annual rate and Builtrite

expects a 5% flotation cost. Taxes are 34%. What is Builtrites WACC?