Question

Calculate the cost of issuing new equity for a firm, assuming issue costs are 6 percent of the share price after taxes; market price per share = $44; current dividend = $4.25; and the constant growth rate in dividends is 4 percent. (Round answer to 2 decimal places, e.g. 15.75%.) Cost Wildhorse Industries after-tax cost of debt is 8.4% and the company has an effective tax rate of 30%. What is the company's yield on debt? (Round answer to 2 decimal places, e.g. 15.75.) Company's yield on debt % A firm's cost of debt can best be estimated: O by adding a risk premium to the coupon rate. O using the yield-to-maturity on newly issued debt of other firms. using the firm's borrowing rate on short-term loans. O using the yield-to-maturity on the firm's outstanding debt. The cost of a security to a company may differ from the security's yield in the capital markets due to: I. Flotation costs II. Agency costs III. Taxes O I only I and II only I and III only

Answer 1

Cost of equity as per gordon formula :

Ke=( Dividend after 1 year / current market price) = $4.25 x 1.04/ 44 = 10.05%

Cost of issuing new equity = 10.05%

Companys Yield on debt = After Tax cost of debt / (1- tax rate)

= 8.4/ (1-0.3) = 12%

Firms cost of debt can best be estimated using yeild to maturity on firms outstanding debt.

the other options arent correct because cost of debt of a firm is calculated using its own cost of debt and not by comparing it with other firms, also it doesnt take into consideration if its short term or long term and neither any risk premium is added .

The 4th option of last question is not visible.

Thanks.