Part 2: Assuming no new common stock will be issued to the public - I.e. -- all new common equity will be internally generated - calculate effective costs and the weighted-average cost of capital for the firm based on the current capital structure, which is assumed to be optimal. 6. What is the Effective Cost of the 4.65% Senior Debentures? a. 1.96% b. 3.02% c. 3.93% d. 4.30% e. 6.04% 7. What is the Effective Cost of the 6.35% Senior Debentures? a. 2.23% b. 3.43% C. 4.46% d. 6.00% e. 6.87% 8. What is the Effective Cost of the 9.10% Subordinated Debentures? a. 2.76% b. 4.25% C. 5.52% d. 5.92% e. 8.50% 9. What is the Effective Cost of the 8.40% Preferred Stock? a. 8.40% b. 7.37% c. 6.91% d. 5.46% Page 2 of 7 I. A Cost of Capital Problem You collect the following information on the debt and equity components of Walkure Corporation's capital structure. The corporation believes it has an optimal capital structure and will use the current capital structure to calculate its cost of capital. Par Capital Structure Components Current Price Value 4.65% Senior Debentures 6.35% Senior Debentures 9.10% Subordinated Debentures 8.40% Preferred Stock Common Equity Totals Book Value [In millions) $31.45 102.72 82.32 20.98 190.00 $424.47 Market Value [In millions) $30.19 100.66 88.08 25.17 259.19 $503.29 Term to Maturity In Years 5 11 14 perpetual $960.00 $1,000 $980.00 $1,000 $1,070.00 $1,000 $30.00 $25 $32.00 $1 The firm has a marginal income tax rate of 35% and flotation costs currently estimated at 2% on debt issues and 5% on equity issues. The company expects to pay a dividend of $0.40 per share on its common next year and growth is expected to be 6.5% annually in the future. Part 2: Assuming no new common stock will be issued to the public - I.e. -- all new common equity will be internally generated - calculate effective costs and the weighted-average cost of capital for the firm based on the current capital structure, which is assumed to be optimal. 6. What is the Effective Cost of the 4.65% Senior Debentures? a. 1.96% b. 3.02% c. 3.93% d. 4.30% e. 6.04% 7. What is the Effective Cost of the 6.35% Senior Debentures? a. 2.23% b. 3.43% C. 4.46% d. 6.00% e. 6.87% 8. What is the Effective Cost of the 9.10% Subordinated Debentures? a. 2.76% b. 4.25% C. 5.52% d. 5.92% e. 8.50% 9. What is the Effective Cost of the 8.40% Preferred Stock? a. 8.40% b. 7.37% c. 6.91% d. 5.46% Page 2 of 7 I. A Cost of Capital Problem You collect the following information on the debt and equity components of Walkure Corporation's capital structure. The corporation believes it has an optimal capital structure and will use the current capital structure to calculate its cost of capital. Par Capital Structure Components Current Price Value 4.65% Senior Debentures 6.35% Senior Debentures 9.10% Subordinated Debentures 8.40% Preferred Stock Common Equity Totals Book Value [In millions) $31.45 102.72 82.32 20.98 190.00 $424.47 Market Value [In millions) $30.19 100.66 88.08 25.17 259.19 $503.29 Term to Maturity In Years 5 11 14 perpetual $960.00 $1,000 $980.00 $1,000 $1,070.00 $1,000 $30.00 $25 $32.00 $1 The firm has a marginal income tax rate of 35% and flotation costs currently estimated at 2% on debt issues and 5% on equity issues. The company expects to pay a dividend of $0.40 per share on its common next year and growth is expected to be 6.5% annually in the future