Question

4. ABC company has preferred stock outstanding with a market price per share of $64. The preferred dividend equals %4 of the $100 par value. What is the cost of preferred stock?

7. Abc bonds sells for $850 have a 5% coupon rate paid annually. $1000 par value and 8 years until maturity. What is the after tax cost debt for abcs bonds if abc has a margital tax rate of 20%?

8.Abc inc. has a stock currently selling for $21. One year ago it was selling for $20. if ABC just paid a dividend of $210 what is the cost of common equity?

Answer 1

1)

Annual dividend = 4% of 100 = 4

Cost of preferred stock = (Annual dividend / price) * 100

Cost of preferred stock = (4 / 64) * 100

Cost of preferred stock = 6.25%

2)

Annual coupon = 5% of 1000 = 50

Yield to maturity = 7.5675%

Keys to use in financial calculator:

FV 1000

PV -850

PMT 50

N 8

CPT I/Y

After tax cost of debt = YTM (1 - tax)

After tax cost of debt = 0.075675 (1 - 0.2)

After tax cost of debt = 0.0605 or 6.05%

3)

Growth rate = [(Ending price - beginning price) / beginning price] * 100

Growth rate = [(21 - 20) / 20] * 100

Growth rate = 5%

Next year dividend = 2.1 (1 + 5%) = 2.205

Cost of common equity = (Dividend in year 1 / current price) + growth rate

Cost of common equity = (2.205 / 21) + 0.05

Cost of common equity = 0.155 or 15.50%

Note: I am assuming $210 is a typo. I have assumed teh dividend to be $2.1. If it is $210, please put it in comments and i will re do the question.