1. currently bonds with a similar credit rating and maturity as the firm\'s outs
ID: 2383725 • Letter: 1
Question
1. currently bonds with a similar credit rating and maturity as the firm's outstanding debt are selling to yield 7.09% while the borrowing firms corporate tax rate is 34%. The after tax cost of debt for the firm is ________% (Round to two decimal places)
2. Common stock for a firm that paid a $1.07 dividend last year. The dividends are expected to grow at a rate of 5.2% per year into the foreseeable future. The price of this stock is now $25.62. The cost of common equity for the firm is _________% (Round to two decimal places)
3. A bond that has a $1,000 par value and a coupon interest rate of 12.6% with interest paid semiannually. A new issue would sell for $1148 per bond and mature in 20 years. The firm's tax rate is 34%. The after tax cost of debt for the firm is ________% (Round to two decimal places)
4. A preferred stock paying a dividend of 6.6% on a $93 par value. If a new issue is offered, the shares would sell for 84.62 per share. The cost of common equity for the firm is _________% (Round to two decimal places)
Explanation / Answer
Answer: To the 1st distinct question among several distinct questions:
Pre tax Cost of debt = yield of bonds with a similar credit rating and maturity = 7.09%
Post tax cost of debt = Pre tax cost of debt(1- tax rate) = 7.09%(1-0.34) = 4.679% (Answer)
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