1. HBM, Inc. has the following capital structure: Assets $400,000 Debt $140,000

ID: 2699861 • Letter: 1

Question

1. HBM, Inc. has the following capital structure:

Assets $400,000 Debt $140,000

Preferred stock 20,000

Common stock 240,000

The common stock is currently selling for $15 a share, pays a cash dividend

of $0.75 per share, and is growing annually at 6 percent. The preferred

stock pays a $9 cash dividend and currently sells for $91 a share.

The debt pays interest of 8.5 percent annually, and the firm is in the

30 percent marginal tax bracket.

a. What is the after-tax cost of debt?

b. What is the cost of preferred stock?

c. What is the cost of common stock?

d. What is the firm%u2019s weighted-average cost of capital?

Need answers for A-D

a. The after tax cost of debt = before-tax rate * (1- marginal tax rate)

=8.5% * (1-30%)

=5.95%

b. The cost of preferred stock =Preferred Stock Dividend/Preferred Stock Value

=$9/$91

=9.89%

c. The cost of common stock =[D1 / P0] +g (by using DividendGrowth Model)

=($0.75 / 15) + 0.06

=11%

d. The firms weighted-average cost of capital=(E/V) * RE + (P/V) * RP +(D/V) * RD

=(0.6 * 11%) + (0.05 * 9.89%) + (0.35 * 5.95%)

=9.18%

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