A firm\'s new bonds will have a 13% current yield. The current price of common s

Question

A firm's new bonds will have a 13% current yield. The current price of common shares is $40.00; the most recent dividend (D0) was $2.00. The firm's tax rate is 35%. The firm is expected to grow at 9% for the foreseeable future. What is their cost of retained earnings?

A firm's new bonds will have a 13% current yield. The current price of common shares is $40.00; the most recent dividend (D0) was $2.00. The firm's tax rate is 35%. The firm is expected to grow at 9% for the foreseeable future. What is their cost of debt?

Explanation / Answer

5. Choice (A) 4.4%

This is equal to 11%*(1-40%)

6. This is FALSE as there is opportunity cost of capital

7. Choice (D) 14.45%

This is equal to 2*1.09/40+9%

8. Choice (B) $ 25

This is equal to 3/12%

9. Choice (C) If a company's tax rate increases then, all else being equal, its weighted average cost of capital will increase.

10. Choice (B) 8.45%

This is equal to 13%*(1-35%)

Hope this helped ! Let me know in case of any queries.

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