5.1. Eugene Corporation may raise new capital in one of the following three ways

Question

5.1. Eugene Corporation may raise new capital in one of the following three ways. It has tax rate of 40%. Find the after-tax cost of new capital.

It can sell common stock at $51 a share, which will pay a dividend of $2.20 next year. The expected rate of growth of dividends is 6% per annum forever. Answer: (10.31%) Show solutions.

It can sell 8.0% bonds at $875 each, which will mature in 5 years. Assume that the bonds pay interest twice a year and the company pays taxes once a year. Answer: (Approximately, 6.720%, exactly, 6.958%) Show solutions.

Explanation / Answer

C) By selling $9 preferred stock at $85 a share, redeemable at par after 5 years.

The after tax cost of capital = 9/85*100

                                         =10.588%

Related Questions

Navigate

• Browse (All)
• Browse 5
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.