Vedder, Inc., has 7.5 million shares of common stock outstanding. The current sh
ID: 2823071 • Letter: V
Question
Vedder, Inc., has 7.5 million shares of common stock outstanding. The current share price is $62.50, and the book value per share is $5.50. Vedder also has two bond issues outstanding. The first bond issue has a face value of $71.5 million, a coupon rate of 7 percent, and sells for 90.5 percent of par The second issue has a face value of $36.5 million, a coupon rate of 8 percent, and sells for 89.5 percent of par. The first issue matures in 20 years, the second in 12 years. The most recent dividend was $3.60 and the dividend growth rate is 6 percent. Assume that the overall cost of debt is the weighted average of that implied by the two outstanding debt issues. Both bonds make semiannual payments. The tax rate is 35 percent. Required: What is the company's cost of equity? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) Cost of equity What is the company's aftertax cost of debt? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) Aftertax cost of debtExplanation / Answer
Cost of equity = (Current dividend*(1+Growth rate) / Stock price) + Growth rate
Cost of equity = (3.60*(1+6%) / 62.5) + 6%
Cost of equity = 12.11%
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Amount in millions
Amount in millions
Using financial calculator BA II Plus - Input details:
First bond
Second bond
FV = Future Value =
$71.50
$36.50
PV = Present Value =
-$64.71
-$32.49
N = Total number of periods = Years x frequency of coupon =
40
24
PMT = Payment = Coupon / frequency of coupon =
$2.5025
$1.4600
CPT > I/Y = Rate or Yield semiannual =
3.9784
4.7802
Convert Yield in annual and percentage form = Yield / 100*2 =
7.96%
9.56%
After-tax cost of debt = YTM x (1-Tax) = Yield x (1-35%) =
5.17%
6.21%
After-tax cost of debt = 5.17%*64.71/(64.71+32.49)+6.21%*32.49/(64.71+32.49)
After-tax cost of debt = 5.52%
Amount in millions
Amount in millions
Using financial calculator BA II Plus - Input details:
First bond
Second bond
FV = Future Value =
$71.50
$36.50
PV = Present Value =
-$64.71
-$32.49
N = Total number of periods = Years x frequency of coupon =
40
24
PMT = Payment = Coupon / frequency of coupon =
$2.5025
$1.4600
CPT > I/Y = Rate or Yield semiannual =
3.9784
4.7802
Convert Yield in annual and percentage form = Yield / 100*2 =
7.96%
9.56%
After-tax cost of debt = YTM x (1-Tax) = Yield x (1-35%) =
5.17%
6.21%
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