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Homework answers / question archive / The Zephyr Corporation is contemplating a new investment to be financed 33 percent from debt
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 price of ?$960. The coupon interest rate is 13 ?percent, and the bonds would mature in 11 years. If the company is in a 39 percent tax? bracket, what is the? after-tax cost of capital to Zephyr for? bonds?
?%. ? (Round to two decimal? places.)
?(Cost of debt?) Sincere Stationery Corporation needs to raise ?$650,000 to improve its manufacturing plant. It has decided to issue a ?$1,000 par value bond with an annual coupon rate of 16 percent and a maturity of 12 years. The investors require a rate of return of 12 percent.
a. Compute the market value of the bonds.
b. What will the net price be if flotation costs are 14 percent of the market? price?
c. How many bonds will the firm have to issue to receive the needed? funds?
d. What is the? firm's after-tax cost of debt if its marginal tax rate is 21 ?percent?
a. What is the market value of the? bonds?
?$
nothing
?(Round to the nearest? cent.)
b. What will the net price be if flotation costs are 14 percent of the market? price?
?$
nothing
?(Round to the nearest? cent.)
c. How many bonds will the firm have to issue to receive the needed? funds?
nothing
bonds ?(Round to the nearest whole? number.)
d. What is the? firm's after-tax cost of debt if its marginal tax rate is 21 ?percent?
nothing
?% ?(Round to two decimal? places.)
?(Individual or component costs of capital?) Compute the cost of the? following:
a. A bond that has ?$1,000 par value? (face value) and a contract or coupon interest rate of 11 percent. A new issue would have a floatation cost of 6 percent of the ?$1,125 market value. The bonds mature in 13 years. The? firm's average tax rate is 30 percent and its marginal tax rate is 24 percent.
b. A new common stock issue that paid a ?$1.20 dividend last year. The par value of the stock is? $15, and earnings per share have grown at a rate of 11 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 ?$25?, but 8 percent flotation costs are anticipated.
c. Internal common equity when the current market price of the common stock is ?$47. The expected dividend this coming year should be ?$3.50?, increasing thereafter at an annual growth rate of 7 percent. The? corporation's tax rate is 24 percent.
d. A preferred stock paying a dividend of 11 percent on a ?$100 par value. If a new issue is? offered, flotation costs will be 13 percent of the current price of ?$176.
e. A bond selling to yield 12 percent after flotation? costs, but before adjusting for the marginal corporate tax rate of 24 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?
nothing
?% ?(Round to two decimal? places.)
b. What is the cost of external common? equity?
nothing
?% ?(Round to two decimal? places.)
c. What is the cost of internal common? equity?
nothing
?% ?(Round to two decimal? places.)
d. What is the cost of capital for the preferred? stock?
nothing
?% ?(Round to two decimal? places.)
e. What is the? after-tax cost of debt on the? bond?
nothing
?% ?(Round to two decimal? places.)
