Question

(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 8 percent. A new issue would have a floatation cost of 8 percent of the $1,145 market value. The bonds mature in 14 years. The firm's average tax rate is 30 percent and its marginal tax rate is 34 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 8 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 $28, but 6 percent flotation costs are anticipated. c. Internal common equity when the current market price of the common stock is $45. The expected dividend this coming year should be $3.50, increasing thereafter at an annual growth rate of 11 percent. The corporation's tax rate is 34 percent. d. A preferred stock paying a dividend of 9 percent on a $150 par value. If a new issue is offered, flotation costs will be 9 percent of the current price of $163. e. A bond selling to yield 12 percent after flotation costs, but before adjusting for the marginal corporate tax rate of 34 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).

(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 8 percent. A new issue would have a floatation cost of 8 percent of the $1,145 market value. The bonds mature in 14 years. The​ firm's average tax rate is 30 percent and its marginal tax rate is 34 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 8 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 $28​, but 6 percent flotation costs are anticipated.

c. Internal common equity when the current market price of the common stock is $45. The expected dividend this coming year should be $3.50​, increasing thereafter at an annual growth rate of 11 percent. The​ corporation's tax rate is 34percent.

d. A preferred stock paying a dividend of 9 percent on a ​$150 par value. If a new issue is​ offered, flotation costs will be 9 percent of the current price of $163.

e. A bond selling to yield 12 percent after flotation​ costs, but before adjusting for the marginal corporate tax rate of 34

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).

Answer 1

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- 11:14 - W @v ra 1x 3 ENG _21-03-202023 ... o X BU295 X fx - BQ BR BS BT BU B V BW BX Formula Bar DY SEMI ANNUAL BOND 1000 8% 274 275 276 277 278 279 280 281 COMPONENT PAR VALUE COUPON RATE COUPON ($) PRICE YEARS PERIODS 80 1053.40 [=1145*(1-0.08)] 14 2 282 MARGINAL TAX RATE = YTM (SEMI ANNUAL) YTM (ANNUAL) COST OF DEBT (AFTER TAX) 34% 3.6909% (=RATE(BU280*BU281,-BU278/BU281,BU279,-BU276)] 7.3817% 4.87% [7.3817%*(1-0.34)] 1.512 283 284 285 286 287 288 289 290 291 292 293 294 295 296 297 298 DO = 1.40, g = 8% f = flotation cost = 6% D1 =DO*(1+g) = 1.40*(1+0.08) = PO = ke = D1/PO(1-f) +g ke = 1.512/(28*(1-0.06)) + 0.08 = 28 13.74% [cost of external common equity] D1 = 3.5 11% g 45 PO = UTILITY, SHARPE, beta KE CAPM coNvexity DGM beta port future INDEX INTL CAP BUD SANDRINE LEASING PORTFOLO Q DIR right clean YIELD bc ... Đ

11:14 W @v ra 1x 3 ENG 21-03-202023 7 X : x fix BQ BR BS BT BU BV B W BX L BY BS313 2 294 295 296 D1 = 297 3.5 11% 45 PO = ke = D1/PO + g ke = 3.5/45 + 0.11 = 18.78% [cost of internal common equity] 298 299 300 301 302 303 304 COST OF PREFERRED STOCK DIVIDEND 150 X 9% = 150 v 13.5 9% FLOTATION COST 163 305 306 PRICE kp = DIVIDEND/(PRICE -f) kp = 13.5/(163(1-0.09)) = 9.10% 307 308 After tax cost of debt = 12%(1-0.34) = 7.92% 309 310 311 312 313 314 315 316 317 318 KE CAPM UTILITY, SHARPE, beta coNvexity DGM beta port future INDEX INTL CAP BUD SANDRINE LEASING PORTFOLO Q DIR right clean YIELD bc ... Đ