You are given the following information for Lightning Power Co Assume the compan

Question

You are given the following information for Lightning Power Co Assume the company's tax rate is 35 percent. Debt: 7,000 6.5 percent coupon bonds outstanding, $1,000 par value, 25 years to maturity, selling for 105 percent of Common stock: 400,000 shares outstanding, selling for $60 per share: the beta is 1.05. Preferred stock: 15,000 shares of 5 percent preferred stock outstanding, currently selling for $100 per share. Market: 12.5 percent market return and 4.5 percent risk-free rate Use these information to answer questions Q1-06 1. What would be the firm's total market value? A. $37,230,00 B. $32,230,00 C. $32,430,00 D. $32,850,00 2. What is the cost of equity? A. 11.85% B. 13.15% C. 13.55% D. 12.90% What is the cost of debt? A. 3.016% B. 3.026% C. 6.03% D. 6.05% 3. 4. What is the cost of preferred stock? A. 5%

Explanation / Answer

1. D. $32850000 ,

market value of debt = $1050 * 7000

= 7350000

market value of common stock = 400000 * $60

= 24000000

market value of preferred stock = 15000 * $100 = $1500000

Total market value = $32850000

2.   d. 12.90% ,

required rate of return = risk free rate + beta *( market return - risk free rate)

= 4.5% + 1.05* (12.5% - 4.5%)

=  4.5% + 1.05 * 8%

= 4.5% + 8.4

= 12.9%

3. b. 3.026% ,

cost of debt = coupon + [(face value - price)/ maturity years] / [(face value + price)/2]

= 65+ [(1000 - 1050)/ 25] / [(1000 + 1050)/2]

= [65-2] / 1025

= 63 / 1025

= 6.105% (approx)

Cost of debt (after tax) = 6.105% * (1-0.35)

= 3.968%

4. A. 5% , cost of preferred stock = dividend / current price

= $5 / $100

= 5%

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