Why Choose Us?
0% AI Guarantee
Human-written only.
24/7 Support
Anytime, anywhere.
Plagiarism Free
100% Original.
Expert Tutors
Masters & PhDs.
100% Confidential
Your privacy matters.
On-Time Delivery
Never miss a deadline.
a
a. A bond that has ?$1,000 par value? (face value) and a contract or coupon interest rate of 7 percent. A new issue would have a floatation cost of 5 percent of the ?$1,140 market value. The bonds mature in 9 years. The? firm's average tax rate is 30 percent and its marginal tax rate is 21 percent.
b. A new common stock issue that paid a ?$1.40 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 ?$27?, but 8 percent flotation costs are anticipated.
c. Internal common equity when the current market price of the common stock is ?$44. The expected dividend this coming year should be ?$3.50?, increasing thereafter at an annual growth rate of 12 percent. The? corporation's tax rate is 21 percent.
d. A preferred stock paying a dividend of 9 percent on a ?$110 par value. If a new issue is? offered, flotation costs will be 13 percent of the current price of ?$175.
e. A bond selling to yield 12 percent after flotation? costs, but before adjusting for the marginal corporate tax rate of 21 percent. In other? words, 12 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?
b. What is the cost of external common? equity?
c. What is the cost of internal common? equity?
d. What is the cost of capital for the preferred? stock?
e. What is the? after-tax cost of debt on the? bond?
Expert Solution
a). We can calculate the cost of debt by using the following formula in excel:-
=rate(nper,pmt,-pv,fv)
Here,
Rate = Cost of debt
Nper = 9 periods
Pmt = Coupon payment = $1,000*7% = $70
PV = $1,140 * (1 - 5%) = $1,083
FV = $1,000
Substituting the values in formula:-
= rate(9,70,-1083,1000)
= 5.79%
After tax cost of debt = Cost of debt * (1 - Tax rate)
= 5.79% * (1 - 21%)
= 4.57%
b). Computation of the cost of external common equity:-
Cost of external equity = (D1 / (Current price * (1 - Flotation cost))) + Growth rate
= ($1.40*(1+9%)/($27*(1-8%))) + 9%
= ($1.526 / $24.84) + 9%
= 6.14% + 9%
= 15.14%
c). Computation of the cost of internal common equity:-
Cost of internal common equity = (D1 / Current price) + Growth rate
= ($3.50 / $44) + 12%
= 7.95% + 12%
= 19.95%
d). Computation of the cost of preferred stock:-
Cost of preferred stock = Dividend / (Current price * (1 - Flotation cost))
= $110*9% / ($175 * (1 - 13%))
= $9.90 / $152.25
= 6.50%
e). Computation of the after tax cost of debt:-
After-Tax Cost of Debt = Yield*(1-Tax Rate)
= 12% * (1 - 21%)
= 9.48%
Archived Solution
You have full access to this solution. To save a copy with all formatting and attachments, use the button below.
For ready-to-submit work, please order a fresh solution below.
