Question

Multiple parts. Would like to check these quick MC that I'm struggling a bit with.

Holdup Bank has an issue of preferred stock with a $6 stated dividend that just sold for $92 per share. Holdup has a 34% tax rate. What is the bank's cost of preferred stock? Choose the range that includes the correct solution. Less than 3% Greater than or equal to 3%, but less than 4% Greater than or equal to 4%, but less than 5% Greater than or equal to 5%, but less than 6% Greater than or equal to 6%

Answer 1

Ques-1)

Cost of Preferred Stock = Annual dividend/Price per share

= $6/$92

= 6.52%

Option greater or equal to 6%

Note- In preferred Stock, Tax effect is not taken while calculating its cost.

Ques-2)

Semi-annual Coupon Payment = $1000*10%*1/2 = $50

No of Coupon payments = (30yrs - 7yrs)*2 = 46

Calculating YTM using EXCEL function:-

	Row- F	Row- G
1
2
3	No of Payments	46
4	Coupon Payment Amount	50
5	Par Value (Future Value)	1000
6	Current Price (Present Value)	-1080
7
8	Rate	4.5801%
9
10	Rate Function-	#=RATE(G3,G4,G6,G5,0)

Semi-annual YTM = 4.5801

YTM = 4.5801%*2

= 9.16%

So, Pre-tax cost of Debt is 9.16%

Greater than or Equal to 9% but less than 10%

Ques-3) False

Risk Free Rate, Market risk premium and Beta are agreeded by a particular country. Risk free rate is rate of Bond issued by country's Goverment. Market risk premium and Beta are evaluated from Country's stock market.