Question

The treasurer of Riley Coal Co. is asked to compute the cost of fixed income securities for her corporation. Even before making the calculations, she assumes the aftertax cost of debt is at least 3 percent less than that for preferred stock. Debt can be issued at a yield of 11.6 percent, and the corporate tax rate is 40 percent. Preferred stock will be priced at $76 and pay a dividend of $7.00. The flotation cost on the preferred stock is $8.

a. Compute the aftertax cost of debt. (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

b. Compute the aftertax cost of preferred stock. (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

c. Based on the facts given above, is the treasurer correct?

Answer 1

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- 2x Insert Delete Format Cell Styles Σ AutoSum : A Fill Sort & Clear Filter Editing Find & Select Cells OH T O O Formula Bar OK OLE ke - Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-Ins % Cut Calibri -11AA = = = Dr Wrap Text General Ea Copy Paste B I U B- SF A Merge Format Painter Merge & Center - Center $ -% % 4:0 .00 . Conditional Format Formatting as Table Clipboard Font Alignment Number Styles OG263 OB OC OD OE OF OG 244 TREASURER 245 COST OF DEBT 11.60% 246 TAX 40% 247 a AFTER TAX COST OF DEBT 6.96% [11.60%*(1-0.40)] 248 249 COST OF PREFERRED STOCK 250 PRICE (PO) 251 DIVIDEND (D) 252 FLOTATION COST (f) 253 254 COST OF PREFERRED STOCK 10.29% [7/(76-8)] 255 PREFERRED STOCKS ARE NOT TAX DEDUCTIBLE 256 SO BEFORE TAX AND AFTER TAX, BOTH COSTS WILL BE SAME 257 258 b AFTER TAX COST OF PREFERRED STOCK 10.29% 259 DIFFEFRENCE BETWEEN TWO COSTS 3.33% [10.29% -6.96%] 260 261 262 c YES, TREASURER IS CORRECT THE DIFFERENCE IS MORE THAN 3% 263 264 HIM convexity DGM betaport future INDEX INTL CAP BUD SANDRINE LEASING PV, FV, ANNUITY DIR right clean KE CAPM UTILITY, SHARPE, beta ferences: CF135 YIELD bond portfolio WACC RI O 203 120% 1 + 199 * 4 ENG 29-11-2019 .