Problem 1. Suppose ABE Co. issued a 20-year, 8 percent coupon rate bond three ye

Question

Problem 1. Suppose ABE Co. issued a 20-year, 8 percent coupon rate bond three years ago. The bond is currently selling for $715.21. The bond has $1.000 face value and pays interests annually. If ABE's tax rate is 30 percent, what is the firm's after tax cost of debt? (6 points) Problem 2. Stock in the U3 Corporation has a beta of 0.78. The market risk premium is 6 percent, and the risk- free rate is 3 percent. U3's next dividend will be $2.10 per share, and the constant growth of dividends is infinitely. If the stock sells for $57.07 per share, what is the constant growth rate of dividends? (6 points) Problem 3. Tomeco Co. has a WACC of 12 percent. Its debt sells at a yield to maturity of 6 percent, and its tax rate is 30 percent. Its cost of equity is 14 percent. What is Tomeco's Equity/Total Assets ratio? (6 points)

Explanation / Answer

1. PV = -715.21, FV = 1000, N = 17, PMT = 80

use rate function in Excel and multiply by (1 - 0.30)

after tax cost of debt = 8.40%

2. cost of equity = 3% + 0.78*6% = 7.68%

growth rate = 7.68% - 2.10/57.07 = 4.00%

3. let equity to assets be X

12% = (1-x)*6%*(1-0.3) + x*14%

x = 0.7959

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.