Questions are in bold. Only question 5 needs to be answered, some of the other a

Question

Questions are in bold. Only question 5 needs to be answered, some of the other answers are needed to answer question 5.

suppose Today is January 1, 2010: MAM industries issued a 30 year bond with a 9% annual coupon and a S1,000 face value, payable on January 1,2030. The bond now sells for $915. Use this bond to determine the firm's after-tax cost of debt. Assume a 34% tax rate. Bond Price = (Coupon 'YTM),( 1-1/( 1+YTND' n) + FVy(1+YTM)^n Bond Price = (90YTMY 1-1/(YTM)"30) + 1 000/(1+YTM)"30 YTM= 9.89%--before tax cost of debt After-tax cost of debt 9.89%(1-taxrate) After-tax cost of debt-6.53% MAM Industries just declared a dividend of S3.50 per share on common stock. The current stock price is $25 per share and the dividend is expected to increase at a rate of 4% per year for the foreseeable future. Use the dividend growth model to compute the cost of equity capital. Price of share Dividend next year (cost of equity - growth rate) 25 3.5*1.04/ (cost of equity-0.04) Cost of equity = 18.56% Suppose the market risk premium is 8.5%, the risk-free rate is 7% and MAM Industries has a beta of 1.35. Use the SMIL to compute the firm's cost of equity capital. Cost of capital-risk free rate + betaFrisk premium 7+1.35*8.5 Cost of capital = 18.475% MAM Industries has a preferred stock issue outstanding which pays an annual dividend of S3.25 per share and currently has a market price of $25 per share. Compute the cost of preferred stock. Cost of preffered stock-Annual dividend/ Current price = 3.2525 Cost of preffered stock = 13%

Explanation / Answer

best estimate of cost of equity = (18.475% + 18.56%)/2 = 18.5175%

weighted average cost of capital

= weight of debt * cost of debt + weight of preferred stock * cost of preferred stock + weight of equity * cost of equity

= 0.3 * 6.53% + 0.1 * 13% + 0.6 * 18.5175%

= 14.3695%

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