Burnwood Tech plans to issue some $50 par preferred stock with a 4% dividend. A

Question

Burnwood Tech plans to issue some $50 par preferred stock with a 4% dividend. A similar stock is selling on the market for $80. Burnwood must pay flotation costs of 2% of the issue price. What is the cost of the preferred stock?

QUESTION 2

David Ortiz Motors has a target capital structure of 30% debt and 70% equity. The yield to maturity on the company’s outstanding bonds is 6.5%, and the company’s tax rate is 40%.ld to Ortiz’s CFO has calculated the company’s WACC as 11.50%. What is the company’s cost of equity capital?

QUESTION 3

Radon Homes’s current EPS is $8.75. It was $5.50 5years ago. The company pays out 40% of its earnings as dividends, and the stock sells for $48.

Calculate the historical annual growth rate in earnings.

QUESTION 4

Suppose a company will issue new 10-year debt with a par value of $1,000 and a coupon rate of 7.5%, paid annually. The tax rate is 40%. If the flotation cost is 2% of the issue proceeds, then what is the after-tax cost of debt? Disregard the tax shield from the amortization of flotation costs.

5.41% 5.00% 4.00% 6.00% 2.55%

Explanation / Answer

Cost of preference share:

= Dividend÷Proceeds from issue

= $50×4%÷($80-2%)

= 2.55%

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