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

ID: 2793233 • Letter: #

Question

. The Killington Corporation has planned capital expenditures of $40 million for the upcoming fiscal ye

ar.

Killington's stock is currently selling at $2

per share. Flotation costs are 10%. The earnings growth rate

has been steady and is expected to continue. The last dividend paid was $

1.20

per share and is expected

to grow at a rate of

%. The company ta

x rate is 40%. The Mortgage bonds are currently selling for

$1,

073.61

. The bonds are

%, $1,000 par and pay interest annually. They will mature in 10 years

a)bonds

b)retained earnings

c)new common stock

a) cost of debt (Bond) = coupon + {[par value - market value]/ number of maturity} / {[par value + market value]/2}

=(0.07 * %1000) + {[1000 - 1073.61]/ 10} / {[1000 + 1073.61] / 2}

=[70 -7.361] / 1036.805

= 62.639 / 1036.805

= 6% (rounded to 6% from 6.04%)

cost of bond after tax = 6% * (1 - 0.4 )

= 3.6%

b) cost of retained earnings = current year dividend (1 + growth rate) / current price + growth rate

=1.20 * (1 + 0.05) / 25 + 5%

=1.26 / 25 + 5%

=5.04% + 5%

=10.04%

Note:- While calculating cost of retained earnings, no flotation cost is considered

c) cost of new common stock = current year dividend (1 + growth rate) / [current price- flotation cost] + growth rate

=1.20 * (1 + 0.05) / [25 - (25*10%)] + 5%

= 1.26 / [25 - 2.5] + 5%

= 1.26 / 22.5 + 5%

= 5.6% + 5%

= 10.6%

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