Question

You are analyzing the after-tax cost of debt for a firm. You know that the firm’s 12-year maturity, 8.00 percent semiannual coupon bonds are selling at a price of $1,039.11. These bonds are the only debt outstanding for the firm.

(a1)

What is the current YTM of the bonds? (Round final answer to 2 decimal places, e.g. 15.25%.)

Cullumber Inc.’s common shares currently sell for $40 each. The firm’s management believes that its shares should really sell for $50 each. The firm just paid an annual dividend of $2 per share and management expects those dividends to increase by 10 percent per year forever (and this is common knowledge to the market).

(a1)

What is the current cost of common equity for the firm? (Round final answer to 2 decimal places, e.g. 15.25%.)

Answer 1

a) Current YTM is calculated using the RATE function:-

=RATE(nper,pmt,pv,fv)

=RATE(12*2,8%/2*1000,-1039.11,1000)*2

=7.50%

Note:- No tax rate is given in the question,if you have the tax rate then do this =7.50%*(1-tax rate), else this is the final answer.

b) Current cost of common equity:

=Expected dividend/current price+growth

=(2*1.1)/40+10%

=15.50%