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ABC Supply, Inc
ABC Supply, Inc. has learned that it will be charged a 9% annual interest rate on the loan for which it applied at First State Bank. ABC Supply has a 26% effective tax rate across all its taxing authorities. What is ABC Supply's after-tax cost of debt financing?
39. Farm-Fresh Products, Inc., a supplier of fresh food products to regional grocery stores, is planning to issue new preferred stock to finance its new distribution warehouse. The preferred stock issue will be sold by an investment banking firm, New Investment Concepts, Inc., which charges a 3% flotation fee on the sale of these securities. The investment banking firm has estimated that the preferred stock will sell for a market price per share of $55.00 before flotation fees. The stock will have a par value of $20.00 per share and will pay a 4% dividend, based on its par value, annually. Given this information, what will be the annual percentage cost to Farm-Fresh Products, Inc. for this preferred stock financing?
Expert Solution
Computation of ABC Supply's after-tax cost of debt financing:
After-tax Cost of Debt Financing = 9%*(1-26%) = 6.66%
Computation of Cost of Preferred Stock Financing:
Cost of preferred stock financing = Annual dividend/ Price after flotation
Here,
Annual dividend = 4%*20 = $0.80
Price after flotation = $55*(1-3%) = $53.35
Cost of preferred stock financing = $0.80/$53.35 = 1.50%
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