Homework Answers
1. First we calculate the semi annual yield to maturity. The semi annual yield to maturity =RATE(nper,pmt,pv,fv) in excel where nper =24*2 = 48, pmt = 0.06*1000/2 = $30, pv =875 -90 =785 and fv =1000
Semi annual yield to maturity =RATE(48,30,-785,1000) = 4.017%
Annual Yield to maturity = 4.017% *2 = 8.034%
Post tax cost of debt = Annual yield to maturity*(1-tax rate) = 8.034%*(1-0.35) = 5.22%
Post tax cost of debt = 5.22%
2. Cost of new common stock = D0*(1+g)/(P0*(1-F)) + g = 2.25*1.05/(85*(1-0.05)) + 0.05
Cost of new equity = 2.3625/80.75 + 0.05 = 0.0792 = 7.92%
3. Cost of internal equity does not consider the flotation cost
Cost of internal equity = D0*(1+g)/P0 + g = 2.50*1.075/55 + 0.075 =0.1239 = 12.39%
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