1. Costs of debt and preferred stock Franklin Mining Co. has 15-year, 8% annual
ID: 2651928 • Letter: 1
Question
1. Costs of debt and preferred stock Franklin Mining Co. has 15-year, 8% annual coupon bonds outstanding. The bonds have a current market price of $885.54 and a face value (RI) of $1,000. If Franklin?s marginal tax rate is 40%, what is its relevant after-tax component cost of debt, rd (1 - T)? 5.68% 6.62% 6.27% 9.46% 5.91% Franklin Is considering Issuing shares of perpetual preferred stock. The preferred stock would have a face value of $100 per share and pay a fixed annual dividend of $7.20 per share. The flotation cost associated with issuing this preferred stock is 4% Of each share?s face value. What is Franklin?s cost of preferred stock (rp)? 8.00% 8.80 % 8.48% 7.50% 8.30%Explanation / Answer
1)YTM=[ Interest +(Redemption price -issue price)/number of years ] / [(Redemption price+issue price)/2]
= [ 80 +( 1000-885.54 )/15 ] / [(1000+885.54)/2]
= [80 +(114.46/15)]/[1885.54/2]
= [80+7.63]/[942.77]
= 87.63 /942.77
=.093 or 9.30 %
After tax cost of debt = Coupon rate (1-tax)
= 9.30(1-.40)
= 5.58%
correct opion is"A" =since 5.58% is nearly approximate to 5.68%
2)cost of preference shares = dividend /(face value-floating cost)
= 7.20 /(100 -[100*4%])
= 7.20 /( 100-4)
= 7.20/96
= .075 or 7.5%
correct option is "D" -7.5%
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