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 $1,000 par value (face value) and a contract

image text in transcribed

(Individual or component costs of capital) Compute the cost of the following: a. A bond that has $1,000 par value (face value) and a contract or coupon interest rate of 9 percent. A new issue would have a floatation cost of 7 percent of the $1,135 market value. The bonds mature in 8 years. The firm's average tax rate is 30 percent and its marginal tax rate is 37 percent. b. A new common stock issue that paid a $1.60 dividend last year. The par value of the stock is $15, and earnings per share have grown at a rate of 9 percent per year. This growth rate is expected to continue into the foreseeable future. The company maintains a constant dividend-earnings ratio of 30 percent. The price of this stock is now $29, but 9 percent flotation costs are anticipated. c. Internal common equity when the current market price of the common stock is $42. The expected dividend this coming year should be $3.30, increasing thereafter at an annual growth rate of 8 percent. The corporation's tax rate is 37 percent. d. A preferred stock paying a dividend of 12 percent on a $140 par value. If a new issue is offered, flotation costs will be 13 percent of the current price of $162. e. A bond selling to yield 14 percent after flotation costs, but before adjusting for the marginal corporate tax rate of 37 percent. In other words, 14 percent is the rate that equates the net proceeds from the bond with the present value of the future cash flows (principal and interest). a. What is the firm's after-tax cost of debt on the bond? % (Round to two decimal places.)

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

Basic Finance An Introduction To Financial Institutions, Investments And Management

Authors: Herbert B Mayo

9th Edition

0324322291, 9780324322293

More Books

Students also viewed these Finance questions

Question

How would you establish the value of learning this material?

Answered: 1 week ago