Question
Musical Memories, Inc. has 230,000 shares of common stock outstanding as a market price of $14 per share. The historical dividends (per share) for the
Musical Memories, Inc. has 230,000 shares of common stock outstanding as a market price of $14 per share. The historical dividends (per share) for the firm were as follows:
2007: $1.10
2008: $1.10
2009: $1.12
2010: $1.15
2011: $1.17
2012: $1.20
Musical Memories also has 8,000 bonds outstanding that are currently selling for 102 percent of face value. The bonds carry an 8.5% coupon rate and mature in 5 years. There are also 51,000 shares of preferred stock outstanding currently selling for $38 per share with an annual dividend of $2.25, perpetually. The firms marginal tax rate is 35%.
16. What is your best estimate for the cost of equity? a. 9.74% b. 8.57% c. 1.76% d. 10.33% e. 10.48%
17. What is your best estimate for the cost of debt? a. 10.00% b. 4.00% c. 8.00% d. 8.43% e. 16.00%
(Correct answers are e and c, please show work)
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