Score: 0 of 10 pts 5 of 10 (5 complete) HY Score: 41.67%, 41.67 of 100 pts P9-17

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Score: 0 of 10 pts 5 of 10 (5 complete) HY Score: 41.67%, 41.67 of 100 pts P9-17 (similar to Question Help Calculation of individual costs and WACC weghted The firm's tax rate is 40% Dilon Labs has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital. The weights 40% long te m debt 15% prefe red st , and 45% co non stock oquity (retained earnings, new common stock or b th average cost is to be measured by using the following Debt The firm can sell for $960 a 1 1-year, $1,000 par value bond paying an $40 per bond af interest at a 8 0 % coupon rate A fotation cost of 2 5 % of he par value is ro ured n a dit r to the dscount of Preferred stock 8.00% (annual dividend) preferred stock having a par value of $100 can be sold for $65. An additional fee of $6 per share must be paid to the udewners. Common stock The firm's common stock is currently selling for $70 per share. The dividend expected to be paid at the end of the coming year (2016) is $3.43. Its dividend payments, which have been approximately 40% of earnings per share in the past 5 years, were as shown in the following table a. The after-tax cost of dett using the bonds yield to maturity (YTM) is N (Round to two decimal places.) Enter your answer in the answer box and then click Check Answer 6 ramaining Clear A

Explanation / Answer

Calculation of after-tax cost of debt:

First calculate the before tax cost of debt. For this use the formula in excel= rate(nper,pmt,pv,fv)

Here,

Nper is the period) = 10

PV (indicates the price after flotation cost) = (960 – 2.5%*1000) = 935

PMT (indicate the annual payment) = 1000*10% = 100

FV (indicates the face value) = 1000

Rate (indicates YTM) = need to calculate

Before tax cost of debt= rate( 10,100,-935,1000)

Before tax cost of debt= 11%

So, the after tax cost of debt= 11*(1-40%)

Therefore, the after tax cost of debt.= 6.6%

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