Tarea 7.1 Problem 1: Royal Road Company, Inc. wants to increase its debt by sell

ID: 2719816 • Letter: T

Question

Tarea 7.1

Problem 1:

Royal Road Company, Inc. wants to increase its debt by selling bonds to $ 900 par value with a
coupon interest of 13% to 10 years, which will be paying annual interest. To do sale, a $ 30 bonus will be offered. Costs incurred in this issue (flotation costs) are $ 15 per bond. Use the approximation formula to calculate the cost of debt.

Problem 2:

The company Maximum All-Stars, Inc. like to discuss the offer of preferred shares West Coast International company. The company plans to issue 15% of preferred shares to sell the par value of $ 63 per share. Costs incurred in this issue (flotation costs) are $ 7 Action. Calculate the cost of these preferred shares.

Problem 3:

Pure Diamond Company, Inc. has consistently paid dividends for 30 years. Dividends have grown at a compound annual rate of 7%. The share price is currently $ 75 and the company plans to pay dividends of $ 5.50 for the next year. Costs incurred in this issue (Flotation costs) are $ 6 per share. Calculate the cost of capital of the common shares.

Problem 4:

Tropical Aloha, Inc. has in its capital structure the following composition: 40% debt and 60% equity.
The estimated cost of debt after tax is 7% and the estimated cost of capital is a 15% Calculate the weighted average cost of capital (WACC).

Explanation / Answer

Solution :

approximation formula to calculate the cost of debt

Cost of debt = interest + (par value - net proceed)/10

(net proceed+par value)/2

900*13%+(900-885)/10

13.28%

(885+900)/2

cost of these preferred shares = dividend/proceeds from issuance

16.88%

(15%*63)/(63-7)

cost of capital of the common shares = (D1/net proceeds from issue) + growth

14.97%

5.5/(75-6) + .07

WACC = rd X 40% + Ke x 60%

11.80%

.07x40% + .15x60%