TION 1

A) Brown Industries can sell 15 years, $1000 par value bonds paying annual interest at 12% coupon rate.The bonds can be sold for $1000 each, the flotation cost of $30 per bond will be incurred in this process.The firm is in the 40% tax bracket.

i) Compute the before tax cost of debt.

(5 marks)

ii) Compute the after tax cost of debt.

(3 marks)

B) Anderson systems has just issued preferred stock.The stock has a 15% annual dividend and $100 par value and was sold at $125 par share.In addition, flotation cost of $15 par share must be paid.

i) Calculate the cost of preferred stock.

(4 marks)

C) RST Ltd. Is currently selling common stock for $90 par share.The firm expects to pay cash dividend of $7 par share next year.The firm's dividend has been growing at an annual rate of 6%, and is expected to continue into the future.The flotation cost is expected to amount to $5 par share and a discount of $7 par share is also offered.The firm can sell an unlimited amount of new common stock under these terms.

i) Compute the cost of common stock.

(4 marks)

D) Explain two (2) disadvantages of discounted cashflow analysis.