(A)- United Business Forms Capital Structure Debt 35% Aftertax Cost of Debt 7% P
ID: 2695071 • Letter: #
Question
(A)- United Business Forms Capital Structure Debt 35% Aftertax Cost of Debt 7% Preferred Stock 15% Cost of Preferred Stock 10% Common Equity 50% Cost of Common Equity 13% Solution: Cost (aftertax) Weights Weighted Cost Debt (Kd) Preferred Stock (Kp) Common Equity (Ke) Weighted Average Cost of Capital (Ka) (B)- Riley Coal Co. Aftertax Cost of Debt Yield 10.6% Solution: Corporate Tax Rate = T 35% Dividend = Dp $4.40 Price of Preferred Stock =Pp $50 Aftertax Cost of Preferred Stock Floatation Cost = F $2.00 Based on the facts above, is the treasurer correct? (C)- North Pole Cruise Lines Annual Dividend $8.00 Original Required Rate of Return 8% New Required Rate of Return 6% Solution: Show your work! a) ORIGINAL PRICE Price of Preferred Stock = CURRENT VALUE b) Price of Preferred Stock = (D)- Tom Cruise Lines, Inc. Par Value $1,000 Real Rate of Return 3% Interest 12% Inflation Rate 5% Time to Maturity=n 20 Risk Premium 4% Yield to Maturity = i Total Return Annuity = A PVIFA Inflation Rate in 5 years 3% PVIF Solution: Compute new required rate of return (yield to maturity) Real Rate of Return Inflation Rate Risk Premium Total Return Present Value of Interest Payments = A * PVIFA Present Value of Interest Payments = Present Value of Principal Payment at Maturity = FV * PVIF Present Value of Principal Payment at Maturity = Total Present Value or Price of the Bond =Explanation / Answer
A)- United Business Forms Capital Structure Debt 35% Aftertax Cost of Debt 7% Preferred Stock 15% Cost of Preferred Stock 10% Common Equity 50% Cost of Common Equity 13%
Solution: Cost (aftertax) Weights Weighted Cost Debt (Kd) =0.35 *7 =2.45%
Weighted Preferred Stock (Kp) =.15*10 = 1.5%
Weighted Common Equity (Ke)= 0.50*13 =6.5%
Weighted Average Cost of Capital (Ka) =Weighted Cost Debt + Weighted Preferred Stock + Weighted Common Equity = 10.45%
(B)- Riley Coal Co. Aftertax Cost of Debt Yield 10.6%
Solution: Corporate Tax Rate = T 35%
Dividend = Dp $4.40
Price of Preferred Stock =Pp $50
Aftertax Cost of Preferred Stock Floatation Cost = F $2.00
Based on the facts above, the treasurer is not correct ,Aftertax Cost of Debt Yield 12.8%.
(C)- North Pole Cruise Lines Annual Dividend $8.00 Original Required Rate of Return 8% New Required Rate of Return 6%
Solution: a) ORIGINAL PRICE Price of Preferred Stock = $8/8% =$100
b) Revised Price of Preferred Stock = $8/6% = $133.33
(D)- Tom Cruise Lines, Inc. Par Value $1,000 Real Rate of Return 3% Interest 12% Inflation Rate 5% Time to Maturity=n 20 Risk Premium 4% Yield to Maturity = i Total Return Annuity = A PVIFA Inflation Rate in 5 years 3% PVIF
Solution: new required rate of return (yield to maturity)= 10%
Real Rate of Return = 3%
Inflation Rate = 3%
Risk Premium = 4%
Present Value of Interest Payments = A * PVIFA Present Value of Interest Payments = 120 * PVIFA (12%,5) + Present Value of {120*PVIFA(10%,15)} = 120*3.6048 + 120*7.6061 =$1345.308
Present Value of Principal Payment at Maturity = FV * PVIF Present Value of Principal Payment at Maturity
= $1000 * PVIF (10%,15) *PVIF (12%,5)
= $1000 *0.2393* 0.5674
= $135.83
Total Present Value or Price of the Bond = $1481.14
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