Question

Question 16 5 pts The Doug and Bob Corporation is calculating its WACC. Its 1,000,000 bonds have a 7% coupon, paid semi-annually, a current maturity of 25 years, and sell for a quoted price of 115. The firm's 1,800,000 shares of preferred stock (par $100) pays a 7.5% annual dividend and currently sells for $95. Doug and Bob is a constant growth firm which just paid a dividend of $2.00 (D.), sells for $30.00 per share; it has 80,000,000 shares outstanding, and the common stock has an estimated growth rate of 7%. The firm's beta is 1.6, and the firm's marginal tax rate is 20%. The market risk premium is 7% and the risk free rate is 5%. What is the firm's (approximate) after-tax cost of debt financing? 3.51% 2.34% 4.68% 5.60% 5.85%

Answer 1

Solution :-

Semiannual Yield to Maturity = 25 * 2 = 50

Semiannual Coupon Payment = $1,000,000 * 7% * 6 / 12 = $35,000

Price = $1,000,000 * 115% = $1,150,000

Face Value = $1,000,000

C8 fac =RATE(C3,C4,C5, C6) B с A D 1 Solution :- 16 2. 3 Semiannual Time to Maturity Nper 4 Semiannual Coupon Payment Pmt 5 Price PV 6 Face Value FV 7 8 Semiannual Yield to maturity YTM 9 50 $35,000 ($1,150,000) $1,000,000 2.925% 10

Annual YTM = 2.925% * 2 = 5.85%

After tax Cost of Debt = 5.85% * ( 1 - 0.20 ) = 4.68%

Therefore Correct Answer is (c)

Solution :- (17)

Annual Dividend = $100 * 7.5% = $7.5

Price of Preferred Stock = $95

Cost of Preferred Stock = $7.5 / $95 = 7.9%

As there is no tax on Preferred Stock

After tax cost of Preferred Stock = 7.9%

Therefore Correct Answer is (a)

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