Great corporation has the following capital situation. Debt One thousand bonds w
ID: 2708204 • Letter: G
Question
Great corporation has the following capital situation. Debt One thousand bonds were issued five years ago at a coupon rate of 8%. They had 25-year termsand $1,000 face values. They are now selling to yield 9%. The tax rate is 39%
Preferred stock: Two thousan shares of preferred are outstanding,each of which pays an annual dividend of $7.50. They originally sold to yield 15% fo their $50 face value. They're now selling to yield 8%.
Equity: Great corp has 133,000 shares of common stock outstanding, currently selling at $12.48 per share.
Dividend expected for next year is $.80 and growth rate is 6%
Explanation / Answer
Debt
Coupon rate = 8%*1000 = 80
Price per bond = 80/(1.09) + 80/(1.09^2 + 80/(1.09^3 ........1080/1.09^20 = $908.71
Total debt = 908.71*1000 = 908,714.54
Equity
12.48 = 0.8/(re-6%)
re = 12.41%
Total equity = 133000*12.48=$1659,840
Preferred stock
Price = 7.50/8% =$93.75
Total Preferred stock =93.75*2000=$187500
Cost of capital = (908,714.54*9%*(1-39%) + 1659,840*12.41% + 187500*8%)/(908,714.54+1659,840+187500) = 9.83%
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