Homework Problems - Cost of Capital

1.The yield to maturity on existing bond debt is 13%. Calculate the after tax cost of debt when the tax rate is 0%, 20%., and 30%.

2.A company plans to issue $100 par preferred stock with an 11% dividend. The stock will sell for $97.00. Floatation cost will be 5% of the market price.

Calculate the cost of preferred stock

3.A company's stock that recently paid a dividend of $2.00 expects to pay a dividend of $2.14 at the end of this year. The shares sell for $23.00 per share. The firm's bonds earn a 12% return, beta is 1.6, the risk-free rate is 9%, and the expected rate of return is 13%.

Calculate the cost of equity (retained earnings) using....

a) the DCF method

b) the CAPM method

c) the bond-yield-plus-risk-premium method

4.A firm's shares sell for $36, the next dividend will be $3.18, its growth rate is 6%. New shares can be sold to net $32.40.

a.What is the firm's cost of internal equity (retained earnings)?

b.What is the firm's percentage floatation costs?

c.What is the firm's cost of external equity (new shares)?

5.A firm's cost of common equity is 16%. Its new bonds will have a 13% coupon and its tax rate is 40%. The capital section of their balance sheet consists of $1,152,000 long-term debt and $1,728,000 equity. Calculate their WACC.

6.A firm expects net income next year of $30 million. Its dividend payout ratio is 40%, and its debt to asset ratio is 60%. There is no preferred stock.

What amount of retained earnings will the firm generate next year?

At what level of financing will there be a break point in the Marginal Cost of Capital (MCC) schedule?

Homework Problems - Cost of Capital 1. The yield to maturity on existing bond debt is 13%. Calculate the after tax cost of debt when the tax rate is 0%, 20%., and 30%. 2. A company plans to issue $100 par preferred stock with an 11% dividend. The stock will sell for $97.00. Floatation cost will be 5% of the market price. Calculate the cost of preferred stock 3. A company's stock that recently paid a dividend of $2.00 expects to pay a dividend of $2.14 at the end of this year. The shares sell for $23.00 per share. The firm's bonds earn a 12% return, beta is 1.6, the risk-free rate is 9%, and the expected rate of return is 13%. Calculate the cost of equity (retained earnings) using.... a) the DCF method b) the CAPM method c) the bond-yield-plus-risk-premium method 4. A firm's shares sell for $36, the next dividend will be $3.18, its growth rate is 6%. New shares can be sold to net $32.40. a. What is the firm's cost of internal equity (retained earnings)? b. What is the firm's percentage floatation costs? c. What is the firm's cost of external equity (new shares)? 5. A firm's cost of common equity is 16%. Its new bonds will have a 13% coupon and its tax rate is 40%. The capital section of their balance sheet consists of $1,152,000 long-term debt and $1,728,000 equity. Calculate their WACC. 6. A firm expects net income next year of $30 million. Its dividend payout ratio is 40%, and its debt to asset ratio is 60%. There is no preferred stock. What amount of retained earnings will the firm generate next year? At what level of financing will there be a break point in the Marginal Cost of Capital (MCC) schedule