1. currently bonds with a similar credit rating and maturity as the firm\'s outs
ID: 2650882 • Letter: 1
Question
1. currently bonds with a similar credit rating and maturity as the firm's outstanding debt are selling to yield 7.19% while the borrowing firms corporate tax rate is 34%. The after tax cost of debt 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 5.9% per year into the foreseeable future. The price of this stock is now $24.77. 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 $1149 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 $100 par value. If a new issue is offered, the shares would sell for 83.14 per share. The cost of common equity for the firm is _________% (Round to two decimal places)
Explanation / Answer
Answer:1 7.19%(1-0.34)
=4.75%
Answer:2 D1=1.07(1+0.059)=1.13313
Ke=(1.13313/24.77)+0.059
=10.47%
Answer:3
YTM = 63+1000-1149/40/1000+1149/2 = 59.275/1074.5 = 0.055165 or 5.5165%
Cost of capital = 5.5165*(1-.34)= 3.64%
Answer:4 6.6/83.14
=7.94%
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