Burnwood Tech plans to issue some $60 par preferred stock with a 7% dividend. A

Question

Burnwood Tech plans to issue some $60 par preferred stock with a 7% dividend. A similar stock is selling on the market for $60. Burnwood must pay flotation costs of 6% of the issue price. What is the cost of the preferred stock? Round your answer to two decimal places.

A company's 8% coupon rate, semiannual payment, $1,000 par value bond that matures in 20 years sells at a price of $593.17. The company's federal-plus-state tax rate is 30%. What is the firm's after-tax component cost of debt for purposes of calculating the WACC? (Hint: Base your answer on the nominal rate.) Round your answer to two decimal places.

Explanation / Answer

Hi,

Please find the detailed answer as follows:

Part A:

Cost of Preferred Stock = (7%*60)/(60 - 60*6%)*100 = 7.45%

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Part B:

After Tax Cost of Debt = Rate(Nper,PMT,PV,FV)*(1-Tax Rate) = Rate(40,40,-593.17,1000)*2*(1-.30) = 9.91%

Thanks.

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