1. currently bonds with a similar credit rating and maturity as the firm\'s outs
ID: 2650815 • Letter: 1
Question
1. currently bonds with a similar credit rating and maturity as the firm's outstanding debt are selling to yield 8.32% 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 $1.05 dividend last year. The dividends are expected to grow at a rate of 5.7% per year into the foreseeable future. The price of this stock is now $25.52. 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 11.7% 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 6.7% on a $96 par value. If a new issue is offered, the shares would sell for 86.69 per share. The cost of common equity for the firm is _________% (Round to two decimal places)
Explanation / Answer
Answer:1 8.32%(1-0.34)
=5.50%
Answer:2 D1=1.05(1+0.057)=1.10985
Ke=(1.10985/25.52)+0.057
=10.05%
Answer:3
YTM = 58.5+1000-1148/40/1000+1148/2 = 54.8/1074 = 0.051024 or 5.102%
Cost of capital = 5.102*(1-.34)= 3.37%
Answer:4 6.432/86.69
=7.4195%
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