Question

urrently bonds with a similar cred rating and maturity as the firms outstandng dett are selling to yield 7.86 percent while the borowing fims corporate tax rate is 34 percent n stock k for a tirm that paid a $1.05 dividend last year The dvidends are expected to grow at a rate of 4.4 pencent per year into the foreseeable future The pnice of this stock is now $24 68 bond that has a $1,000 par value and a coupon interest rate of 11.8 percent with interest paid semially A new issue wold sell for $1,154 per bond and mature in 20 years The fem's tax rate is 34 percent A preferned stock paying a dividend of 63 percent on a $105 pw value If a new issue is offered, the shares would sell for $85 74 per share The ater-tax cost of dote dett for the fim is. (Round to two decimal places) The cost of common equty for the tem is[、Rund to two decimal places.) The arter-tax cost of dett for the firm )% (Rond to two decral places ) The cost of preferred stock for the firm tsD. (Round to two decimal places )

Answer 1

The after Tax cost of Debt =Yield*(1-Tax Rate) = 7.86%*(1-34%) = 5.19%
Cost of Common Equity = Dividend*(1+Growth)/Price + Growth = 1.05*(1+4.4%)/24.68+4.4%= 8.84%

Par value of Bond = 1000
Coupon = 11.8%*1000/2 = 59
Price = 1154
Number of Periods = 2*20 = 40
YTM using excel formula =2*RATE(40,59,-1154,1000) = 10.00%

Cost of Preferred stock = Dividend* Par value/Price = 6.3%*105/85.74 = 7.72%