2. The Killington Corporation has planned capital expenditures of $40 million fo

Question

2. The Killington Corporation has planned capital expenditures of $40 million for the upcoming fiscal year. Killington's stock is currently selling at $22per share. Flotation costs are 10%. The earnings growth rate hasbeen steady and is expected to continue. The last dividend paid was $0.97per share and is expected to grow at a rate of 9%. The company tax rate is 40%. The Mortgage bonds are currently selling for $1,073.61. The bonds are 7%, $1,000 par and pay interestannually. They will mature in 10 years.ALL FORMULAS CAN BE FOUND IN CHAPTER 10 SLIDES OR WACC EXAMPLE

Compute the after-tax cost of each component of capital.

A. Bonds

B. Retained Earnings

C. New Common Stock

Explanation / Answer

Bonds we have to find the yield to maturity of bonds

RATE(20,-35,1073.61,-1000,0,0) =3%

Yield to maturoty = 3%*2 =6%

After tax cost of bonds = 6%*(1-0.4) =3.6%

Retained Earnings (withouth folation cost)

= 0.97*(1.09)/22.5 +9%

=13.81%

Coomon stock (withouth folation cost)

He will get 22*(1-.1)

Required rerutn = D1/P +G

=14.34%

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