1. Capital structure is 40% debt, 10% preferred stock, and 50% common equity Com
ID: 2716067 • Letter: 1
Question
1. Capital structure is 40% debt, 10% preferred stock, and 50% common equity
Common stock currently sells for $27.00
The expected CS dividend is $0.50
Growth rate is 8.00%
Flotation cost on CS $1.25
Flotation cost on PS $1.10
Preferred stock sells for $46.00
PS pays a dividend of $5.00
Market yield on bonds is 9.00%
Tax rate is 34.00%
Calculate the firm's cost of debt
A. 5.94%
B. 9.85%
C. 11.14%
2.
40% debt,
10% preferred stock, and
50% common equity
34.00%
Calculate the firm's cost of preferred stock
A. 9.85%
B. 9.00%
C. 11.14%
3.
40% debt,
10% preferred stock, and
50% common equity
Calculate the firm's cost of retained earnings
A. 5.94%
B. 9.85%
C. 11.14%
4.
40% debt,
10% preferred stock, and
50% common equity
Calculate the firm's cost of new common stock
A. 10.44%
B. 10.68%
C. 11.25%
Capital structure is40% debt,
10% preferred stock, and
50% common equity
Common stock currently sells for $27.00 The expected CS dividend is $0.50 Growth rate is 8.00% Flotation cost on CS $1.25 Flotation cost on PS $1.10 Preferred stock sells for $46.00 PS pays a dividend of $5.00 Market yield on bonds is 9.00% Tax rate is34.00%
Explanation / Answer
1. Cost of debt = Market yield on bond * (1 - tax rate)
= 9% * (1 -34%)
= 5.94% which is option (A)
2. Cost of preferred stock = Dividend / (Selling price - Floatation cost)
= $5 / ($46 - $1.10)
= 11.14% which is option (C)
3. Cost of retained earning = Dividend just paid / (Sellin price - Floatation cost) + Growth rate
= [$0.50/(1+8%)] / ($27 - $1.25) + 8%
= 9.80% which is close to option (B)
4. Cost of new common stock = Dividend / (Selling price - Floatation cost) + Growth rate
= [$2/(1+6%)] / ($45 - $2.25) + 6%
= 10.41% which is close to option (A)
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