Great Corporation has the following capital situation. Debt: One thousand bonds
ID: 2628031 • Letter: G
Question
Great Corporation has the following capital situation.
Debt: One thousand bonds were issued five years ago at a coupon rate of 11%. They had 20-year terms and $1,000 face values. They are now selling to yield 9%. The tax rate is 37%
Preferred stock: Two thousand shares of preferred are outstanding, each of which pays an annual dividend of $7.50. They originally sold to yield 15% of their $50 face value. They're now selling to yield 11%.
Equity: Great Corp has 108,000 shares of common stock outstanding, currently selling at $18.48 per share. Use the risk premium approach and assume a 3% risk premium
Explanation / Answer
Debt :
After tax cost of debt = 9 (1-.37)
= 9 * .63
= 5.67%
Market price (Current price) = PVAF@9%,20 * Interest +(PVF@9%,20 * face value)
= ( 9.12855* 110 ) + (.17843 *1000)
=1004.14 + 178.43
= $ 1182.57
Total maket value = 1000 * 1182.57 =$ 1,182,570.5
Preferred stock = Yield = 11%
current price = 7.50 / .11 = $ 68.18 per share
Total market price = 68.18*2000 = 136,360
cost of preferred stock = 7.50 /50 = .15 or15%
common stock = I think information regarding Calculation of expected return using risk premium is missing..please provide that too.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.