Question

The 10.3 percent preferred stock of Avogadro Numerics is selling for $50 a share. What is the firm's cost of preferred stock if the tax rate is 39.1 percent and the par value per share is $100?

The Poisson Distributors has a cost of equity of 15 percent and a pre-tax cost of debt of 8.7 percent. The firm's target weighted average cost of capital is 11.3 percent and its tax rate is 28.1 percent. What is the firm's target debt-equity ratio

Heisenberg's Casinos would like to issue new equity shares if its cost of equity declines to 9.2 percent. The company pays a constant annual dividend of $1.86 a share. What does the market price of the stock need to be for the firm to issue the new shares?

Answer 1

Market Price of the share = $50

Annual Dividend = Par Value of the Preferred Stock* 10.3%

Annual Dividend = $100*10.3% = $10.30

Cost of Preferred stock = Annual Dividend/ Market Price*100 = $10.30/$50*100

Cost of Preferred stock = 20.60%

Cost of Equity of Poisson Distributors = 15%

Pre-Tax Cost of Debt = 8.7%

Tax Rate = 28.10%

Target Weighted Average Cost of Capital = 11.30%

Post-Tax Cost of Debt = 8.7% * (1- 0.2810) = 6.26%

WACC = Cost of Equity* Weight of Equity + Post-Tax of Debt* (1- weight of equity)

11.30% = 15%* Weight of equity + 6.26% – 6.26%Weight of Equity

5.04% = 8.74% Weight of Equity

Weight of Equity = 57.66%~ 58%

Weight of Debt = 100- Weight of Equity = 100% - 58% = 42%

Target (Debt/ Equity) = 42%/ 58% = 0.72

Cost of Equity of Heisenberg's Casinos = 9.2%

Constant Annual Dividend = $1.86 per share

Market Price per share = Constant Dividend/ Cost of Equity

Or, Market Price per share = $1.86/ 0.092= $20.22

Market Price of the stock needed for the firm to issue new shares would be $20.22