Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

( Individual or component costs of capital ) Compute the cost of the following:a . A bond that has $ 1 , 0 0 0

(Individual or component costs of capital) Compute the cost of thefollowing:a. A bond that has $1,000 par value(face value) and a contract or coupon interest rate of 6 percent. A new issue would have a floatation cost of 8 percent of the $1,140 market value. The bonds mature in 5 years. Thefirm's average tax rate is 30 percent and its marginal tax rate is 25 percent.b. A new common stock issue that paid a $1.70 dividend last year. The par value of the stock is$15, and earnings per share have grown at a rate of 8 percent per year. This growth rate is expected to continue into the foreseeable future. The company maintains a constantdividend-earnings ratio of 30 percent. The price of this stock is now $23, but 8 percent flotation costs are anticipated.c. Internal common equity when the current market price of the common stock is $43. The expected dividend this coming year should be $3.00, increasing thereafter at an annual growth rate of 7 percent. Thecorporation's tax rate is 25 percent.d. A preferred stock paying a dividend of11 percent on a $110 par value. If a new issue isoffered, flotation costs will be14 percent of the current price of $179.e. A bond selling to yield 14 percent after flotationcosts, but before adjusting for the marginal corporate tax rate of 25 percent. In otherwords,14 percent is the rate that equates the net proceeds from the bond with the present value of the future cash flows(principal andinterest).Questions Belowa. What is thefirm's after-tax cost of debt on thebond? enter your response here%(Round to two decimalplaces.)b. What is the cost of external commonequity? enter your response here%(Round to two decimalplaces.)c. What is the cost of internal commonequity? enter your response here%(Round to two decimalplaces.)d. What is the cost of capital for the preferredstock? enter your response here%(Round to two decimalplaces.)e. What is theafter-tax cost of debt on thebond? enter your response here%(Round to two decimalplaces.)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Principles Of Accounting

Authors: Robert Libby, Patricia Libby, Fred Phillips, Stacey Whitecotton

1st Edition

978-0077300456, 0077300459

Students also viewed these Finance questions

Question

What do you mean by dual mode operation?

Answered: 1 week ago

Question

Explain the difference between `==` and `===` in JavaScript.

Answered: 1 week ago