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 6 percent. A new issue would have a floatation cost of 6 percent of the $1,140 market value. The bonds mature in 7 years. The​ firm's average tax rate is 30 percent and its marginal tax rate is 37 percent.

b. A new common stock issue that paid a $1.50 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 $24, but 6 percent flotation costs are anticipated.

c. Internal common equity when the current market price of the common stock is ​$51. The expected dividend this coming year should be $3.40, increasing thereafter at an annual growth rate of 7 percent. The​ corporation's tax rate is 37 percent.

d. A preferred stock paying a dividend of 9 percent on a $120 par value. If a new issue is​ offered, flotation costs will be 11 percent of the current price of $173.

e. A bond selling to yield 8 percent after flotation​ costs, but before adjusting for the marginal corporate tax rate of 37 percent. In other​ words, 8 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.)

Answer 1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

? v u 1x 05:05 ENG 06-03-2020 23 X Fax BW276 - 271 - BO BR BS BT BU BV BW BX BY a 273 276 1000 6% COMPONENT PAR VALUE COUPON RATE COUPON ($) PRICE YEARS PERIODS 1071.60 (1140*(1-0.06)] 2 278 279 280 281 282 283 284 285 286 MARGINAL TAX RATE = YTM (SEMI ANNUAL) YTM (ANNUAL) COST OF DEBT (AFTER TAX) 37% 2.3921% (=RATE(BU280*BU281,-BU278/BU281,BU279,-BU276)] 4.7843% 3.01% [4.7843%*(1-0.37)] DO = 1.50,8 = 11% f = flotation cost = 6% D1 DO*(1+g) = 1.80*(1+0.11) = PO = ke = D1/PO(1-f) + g ke = 1.665/(24*(1-0.06)) + 0.11 = 289 290 291 292 293 294 295 1.665 24 18.38% [cost of external common equity] KE CAPM UTILITY, SHARPE, beta coNvexity DGM beta port future INDEX INTL CAP BUD SANDRINE LEASING PORTFOLOQ DIR right clean YIELD bc ... ►

? v 1* 05:05 ENG 06-03-207023 BR312 X fix - BQ BR BS BT BU B V BW BX BY 294 295 296 D1 = 3.4 297 298 299 PO = ke = D1/PO + 8 ke = 3.4/51 + 0.07 = 13.67% [cost of internal common equity) 300 301 302 d 303 COST OF PREFERRED STOCK DIVIDEND 120 X 9% = 10.8 11% FLOTATION COST 173 305 306 PRICE kp = DIVIDEND/(PRICE-f) kp = 10.8/(173(1-0.11)) = 307 7.01% After tax cost of debt = 8%(1-0.37) = 5.04% 308 309 310 311 312 313 314 315 316 317 318 KE CAPM UTILITY, SHARPE, beta coNvexity DGM beta port future INDEX INTL CAP BUD SANDRINE LEASING PORTFOLOQ DIR right clean YIELD bc ... ►