Question

Brookes Corporation has an expected dividend (D1) of $1.60, a current stock price (Po of $40, and a constant growth rate of 7.6%. If new common stock is issued, the company will incur flotation costs of 6%, what is the company's cost of retained earnings? Your answer should be between 9.28 and 12.82, rounded to 2 decimal places, with no special characters. D Question 4 5 pts Several years ago, the Jakobe Company issued a $1,000 par value, non-callable bond that now has 20 years to maturity and a 7% annual coupon that is paid semiannually. The bond currently sells for $905, and the company's tax rate is 40%, what is the component after-tax cost of debt for use in the WACC calculation? Your answer should be between 3.34 and 5.43, rounded to 2 decimal places, with no

Answer 1

1)

Cost of retained earnings = (D1 / stock price) + growth rate

Cost of retained earnings = (1.6 / 40) + 0.076

Cost of retained earnings = 0.116 or 11.60%

2)

Number of periods = 20 * 2 = 40

Coupon = (0.07 * 1000) / 2 = 35

Yield to maturity = 7.9569%

Keys to use in a financial calculator: 2nd I/Y 2, FV 1000, N 40, PMT 35, PV -905, CPT I/Y

After tax cost of debt = 0.079569 (1 - 0.4)

After tax cost of debt = 0.0477 or 4.77%