Question

builtrite is planning on offering a $1000par value 20 years, 5% coupon bond with an expected selling price of $1025. flotation costs would be $55 per bond. preferred stock: Burtrite could sell a $46 par value preferred with a 5%couponn for $38 a share. Flotation cost would be $8 a share. common stock currently the stock is selling for 62$ a share and has paid a $5.82 dividend. dividends are expected to keep growing at 11% floatation costs would be $3.75 a share and Builtrite has $350,000 in available retained earnings. Assume a 40% tax bracket. Their after-tax cost of internal common(retained earings) is: I need the whole solution ASAP!!! A. 3.15% B. 3.56% C. 5.26% D. 5.83%

Answer 1

(i)	g =	11%
	P0 =	62
	D1 =	5.82 x (1+11%)	6.4602
	Flotation cost =	3.75
	Net proceeds =	Price - flotation cost	=62-3.75 =	58.25
	Re =	D1/ Net proceeds + g
	Re =	6.4602/58.25 + 0.11
	Re =	22%
(ii)	Cost of debt(Bonds)
	Par =	1000
	Coupon =	1000*5% =	50
	N =	20
	Price =	1025
	Net proceeds =	1025 -55 =	970
	YTM is the rate at which net proceeds =pv of cashflows
	970 =	50 x PVAF(YTM,20)+ 1000 xPVIF(YTM,0)
	YTM		PV of cashflows
	6%		885.3008
	r		970		-30
	5%		1000		-114.699
					0.261554
	YTM =
	r-5/6-5 =		970-1000/(885.3008-1000)
	r-5 =		-30/-114.699
	r =		5+	0.261554
	r =		5.26
			Approx
	Post tax cost of debt =		=5.26 x (1-0.4)
			3.15%
(iii)	Cost of preferred stock =
	Dividend/ Net proceeds x 100
	(46 x 5%)/(38-8) x 100
	7.67%
	Answer -
	Cost of retaained earnings is the cost of issuing additional capital -
	here minimum cost of capital is cost of debt i.e. 3.15%
	Therefore the opportuinity cost is 3.15%
	Answer is 3.15 %
	(A)