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1 Belton is issuing a $1,000 par value bond that pays 7 percent annual interest and matures in 15 years. Investors are willing to pay $ 958 for the bond. Flotation be 11 percent of market value. The company is in an 18 percent tax bracket. What will be the firm's best after-tax cost of debt on the bond? Interest 0.07 Net Price 958 Floatation 0.11 852.62 Par Value $1,000 After-tax cost 6.73% I don't believe this is correct 2 The preferred stock of Julian Industries sells for $36 and pays $3.00 in dividends. The net price of the security after issuance costs is $32.50. What is the c Dividends Sell price Cost of Capital 3 32.5 9.23% 3 The Zephyr Corporation is contemplating a new investment to be financed 33 percent from debt. The firm could sell new $1,000 par value bonds at a net p The coupon interest rate is 12 percent, and the bonds would mature in 15 years. If the company is in a 34 percent tax bracket, what is the after-tax cost of c Par Value 1000 Interest 0.07 70 Years to maturity 15 Market Price 945 Flotation 0.11 Tax Rate 0.18 Net Price 841.05 Cost 8.97% After tax 7.35% 4 Your firm is planning to issue preferred stock. The stock sells for $115; however, if new stock is issued, the company would receive only $98. The par value of the stock is $100, and the dividend rate is 14 percent. What is the cost of capital for the stock to your firm? Market price 115 Net price 98 Par Value 100 Dividend rate 0.14 Cost 14.29% 5 Pathos Co.'s common stock is currently selling for $23.80. Dividends paid last year were $0.70. Flotation costs on issuing stock will be 10 percent of market price. The dividends and earnings per share are projected to have an annual growth rate of 15 percent. What is the cost of internal common equity for Pathos? Dividends 0.7 Selling Price 23.8 Growth Rate 0.15 Floatation Cost 2.38 Cost of Equity 18.76% 6 The common stock for the Bestsold Corporation sells for $58. If a new issue is sold, the flotation costs are estimated to be 8%. The company pays 50% of its earnings in dividends, and a $4 dividend was recently paid. Earnings per share 5 years ago were $5.00. Earnings are expected to continue to grow at the same annual rate in the future as during the past 5 years. The firms marginal tax rate is 34%. Cost of internal common equity? Current price Flotation rate Dividends payout Dividends Earnings per share Rate Present Value Future Value Nper Rate Cost of internal equity Cost of external equity Price of flotation cost 58 8% 50% 4 5 34% 5 8 5 9.86% 17.43% 18.09% $53.36 7 Sincere Stationery Corporation needs to raise $500,000 to improve its manufacturing plant. It has decided to issue a $1,000 par value bond with a 14 percent annual coupon rate and a 10-year maturity. The investors require a 9 percent rate of return. A) Compute the market value of the bonds. Par Value Coupon rate = Years to maturity = 10 1000 140 10 Required rate of return Market Value 0.09 $898.47 $422.41 $1,320.88 B) What will the net price be if flotation costs are 10.5 percent of the market price? Net Price = Market Value - Floatation cost Flotation Cost = $138.69 Net Price = $1,182.19 C) How many bonds will the firm have to issue to receive the needed funds? Sincere Stationery Corporation needs/ Net Price Number of bonds 379 So, 4983 bonds will the firm have to issue to receive the needed funds. D) What is the firm's after-tax cost of debt if its average tax rate is 25 percent and its marginal tax rate is 34 percent? Cost of debt 10.92% After-tax cost of debt 8.19% 8 Rework Problem 7: Assume 8 percent coupon rate. What effect does changing the coupon rate have on the firms's after-tax cost of capital? Par Value Coupon rate = Years to maturity = 10 Required rate of return Market Value 1000 80 10 0.09 $513.41 $422.41 $935.82 Net Price = Market Value - Floatation cost Flotation Cost = $98.26 Net Price = $837.56 Sincere Stationery Corporation needs/ Net Price Number of bonds 534 Cost of debt After-tax cost of debt Why is there a change? 10.73% 8.05% the cost of capital for the preferred stock? a net price of $945. st of capital to Zephyr for bonds