2. The Varian Company\'s next expected dividend, Di , is $3.18, its growth rate

Question

2. The Varian Company's next expected dividend, Di , is $3.18, its growth rate is 6%; and the stock now sells for $36. New stock can be sold to net the firm $32.40 per share What is Varian's percentage flotation cost? What is Varian's cost of new common stock? Flotation Costs Cost of new common stock A. 12% B. 10% C. 12% D. 10% 12.45% 16.77% 19.33% 15.80% 3. Reilly Inc. is trying to determine its cost of debt. The company has a debt issue outstanding with 14 years to maturity that is quoted at 89% of par value. The issue makes semiannual payments and has an embedded cost of 8% annually. What is the pretax cost of debt? If the tax rate is 40%, what is the aftertax cost of debt? Pretax Aftertax A. 8.33% B. 9.43% C. 10.25% D. 8.33% 4.98% 5.66% 6.58% 4. Brealey Corp. has a target capital structure of 40% common stock, 10% preferred stock, and 50% debt. Its cost of equity is 16%, the cost of preferred stock is 7%, and the cost of debt is 12%. If the tax rate is 45%, what is Brealey Corp.'s WACC? A. 12.55% ?. 11.87% C. 10.40% D. 12.98%

Explanation / Answer

Question - 2

Variance cost of New common stock

= [ (D0 / P1) x 100 ] + g

= [ ($3.18 /32.40) x 100 ] + 6%

= 9.80% + 6%

= 15.80%

Flotation Cost = 10%

Variance cost of New common stock = 15.80%

Question – 3

Yield To Maturity [YTM]

YTM = Coupon Amount + [ (Par Value – Bond Price) / Maturity Years ] / [(Par Value + Bond Price)/2]

= $80 + [ ($1,000 - 890) / 14 ) ] / [($1,000 + 890) / 2 ]

= [ ($80 + 7.86) / 945 ] x 100

= 9.43%

Pre Tax Yield = 9.43%

After Tax Yield = 9.43% x [ 1 – 0.40 ] = 5.66%

Question – 4

WACC = [ Cost of equity x Weight of common stock ] + [ Cost of Preferred stock x Weight of preferred stock ] + [ After Tax Cost of Debt x Weight of Debt ]

= [ 16% x 0.40 ] + [ 7% x 0.10 ] + [ 6.6% x 0.50 ]

= 6.4% + 0.7% + 3.3%

= 10.4%

WACC = 10.4%

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