Problem 1 A company issues 15-year, $1,000 par-value bonds, with a coupon rate o

Question

Problem 1

A company issues 15-year, $1,000 par-value bonds, with a coupon rate of 5%. The bonds are sold for $619.70. The tax rate is 30%. Compute the cost of debt before taxes and after taxes.

Problem 2

Suppose a company issues common stock to the public for $25 a share. The expected dividend is $2.50 per share and the growth in dividends is 8%. If the flotation cost is 10% of the issue proceeds, compute the cost of external equity, re.

Problem 3

Calculate the cost of preferred stock (rPS) with the given information:

                Par Value = $200

                Current Price = $208

                Flotation Cost = $16

                Annual Dividend = 12% of Par

Problem 4

A firm expects to earn $3.50 per share during the current year, its expected dividend payout ratio is 65%, its expected constant dividend growth rate is 6.0%, and its common stock currently sells for $32.50 per share.  New stock can be sold to the public at the current price, but a flotation cost of 5% would be incurred.  What would be the cost of equity from new common stock (re)?

Problem 5

Suppose you are informed that a company expects to pay a $2.50 dividend at year end (D1 = $2.50), the dividend is expected to grow at a constant rate of 5.50% a year, and the common stock currently sells for $52.50 a share. The before-tax cost of debt is 7.50%, and the tax rate is 40%.  The target capital structure consists of 45% debt and 55% common equity.  What is the company

A company issues 15-year, $1,000 par-value bonds, with a coupon rate of 5%. The bonds are sold for $619.70. The tax rate is 30%. Compute the cost of debt before taxes and after taxes. Suppose a company issues common stock to the public for $25 a share. The expected dividend is $2.50 per share and the growth in dividends is 8%. If the flotation cost is 10% of the issue proceeds, compute the cost of external equity, re. Calculate the cost of preferred stock (rPS) with the given information: Par Value = $200 Current Price = $208 Flotation Cost = $16 Annual Dividend = 12% of Par A firm expects to earn $3.50 per share during the current year, its expected dividend payout ratio is 65%, its expected constant dividend growth rate is 6.0%, and its common stock currently sells for $32.50 per share. New stock can be sold to the public at the current price, but a flotation cost of 5% would be incurred. What would be the cost of equity from new common stock (re)? Suppose you are informed that a company expects to pay a $2.50 dividend at year end (D1 = $2.50), the dividend is expected to grow at a constant rate of 5.50% a year, and the common stock currently sells for $52.50 a share. The before-tax cost of debt is 7.50%, and the tax rate is 40%. The target capital structure consists of 45% debt and 55% common equity. What is the company's WACC if all the equity used is from retained earnings?

Explanation / Answer

Let i be yield to maturity rate.

P = C * ( 1 - ( 1 +i)^-N)/i + M* (1+i)^-N

here

P = 619.7

M = 1000

C = 1000 * 0.05 = 50

N = 15

619.7 = 50* (1 - (1+ i)^-15/i + 1000 * (1 + i)^-15

619.7 i = 50 - 50 * (1+ i)^ -15 + 1000*i*(1+i)^-15

(619.7 i - 50) = (1+i)^-15 * ( 1000*i - 50)

solving we get i = 9.93 %

( use online solver to solve for yield to maturity. It can't be calculated directly. we have to use a trail and error method or an iterative method)

Cost of debt = i * (1 -T) = 0.0993 * ( 1 - 0.3) = 6.95 %   

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