Question

In: Finance

The Smith Company has 10,000 bonds outstanding. The bonds are selling at 102% of face value,...

The Smith Company has 10,000 bonds outstanding. The bonds are selling at 102% of face value, have a 8% coupon rate, pay interest annually, mature in 10 years, and have a face value of $1,000. There are 500,000 shares of 9% preferred stock outstanding with a current market price of $91 a share and a par value of $100. In addition, there are 1.25 million shares of common stock outstanding with a market price of $64 a share and a beta of .95. The most recent dividend paid by the company on the common stock was of $1.10 and it expects to increase those dividends by 3% annually forever. The firm's marginal tax rate is 35%. The overall stock market is yielding 12% and the Treasury bill rate is 3.5%.

1. What is the cost of equity based on the dividend growth model?

2. What is the cost of equity based on the security market line?

3. What market weights should be given to the various capital components in the weighted average cost of capital computation?

4. What is the weighted average cost of capital using the cost equity calculated based on CAPM?

Solutions

Expert Solution


Related Solutions

Problem (10 marks) The Smith Company has 10,000 bonds outstanding. The bonds are selling at 102%...
Problem The Smith Company has 10,000 bonds outstanding. The bonds are selling at 102% of face value, have a 8% coupon rate, pay interest annually, mature in 10 years, and have a face value of $1,000. There are 500,000 shares of 9% preferred stock outstanding with a current market price of $91 a share and a par value of $100. In addition, there are 1.25 million shares of common stock outstanding with a market price of $64 a share and...
The Kenny Company has 10,000 bonds outstanding. The bonds are selling at 98% of face value,...
The Kenny Company has 10,000 bonds outstanding. The bonds are selling at 98% of face value, have a 10% coupon rate, pay interest semi-annually, and mature in 9 years. There are 1.87 million shares of common stock outstanding with a market price of $15 a share and a beta of 0.89. The common stock just paid a dividend of $0.7474 and expects to increase those dividends by 1.35% annually. The flotation cost for equity is 6.5% and the flotation cost...
a XXX123 has 66,000 bonds outstanding that are selling at par. The face value of each...
a XXX123 has 66,000 bonds outstanding that are selling at par. The face value of each bond is $1,000. Bonds with similar characteristics have yield to maturity of 7.5 percent. The company also has 600,000 shares of preferred stock and 2.5 million shares of common stock outstanding. The preferred stock sells for $40 a share and pays annual dividends of $4 per share. The common stock has beta of 1.25 and sells for $44 a share. The risk free rate...
The Kenny Company has 10,000 bonds outstanding. The bonds are selling at 98% of face value, have a 10% coupon rate, pay interest semi-annually, and mature in 9 years.
  The Kenny Company has 10,000 bonds outstanding. The bonds are selling at 98% of face value, have a 10% coupon rate, pay interest semi-annually, and mature in 9 years. There are 1.87 million shares of common stock outstanding with a market price of $15 a share and a beta of 0.89. The common stock just paid a dividend of $0.7474 and expects to increase those dividends by 1.35% annually. The flotation cost for equity is 6.5% and the flotation...
CBA Corporation's outstanding bonds are selling at $950. The bonds have a face value of $1000,...
CBA Corporation's outstanding bonds are selling at $950. The bonds have a face value of $1000, annual coupon rate of 8.5%, and 10 years until maturity. CBA is planning to sell new bonds to raise additional capital. New bonds will be as risky as the old bonds. However, the firm will incur flotation costs of 10% on new bond issue. A. Calculate investors required rate of return on new bonds. B. Calculate the before-tax cost of (new) debt.
Jallouk Corporation has two different bonds currently outstanding. Bond M has a face value of $10,000...
Jallouk Corporation has two different bonds currently outstanding. Bond M has a face value of $10,000 and matures in 20 years. The bond makes no payments for the first six years, then pays $1,700 every six months over the subsequent eight years, and finally pays $2,000 every six months over the last six years. Bond N also has a face value of $10,000 and a maturity of 20 years; it makes no coupon payments over the life of the bond....
(Bonds) A company has an outstanding issue of $1000 face value bonds with 8.75% annual coupon...
(Bonds) A company has an outstanding issue of $1000 face value bonds with 8.75% annual coupon and 10 years remaining until maturity. The bonds are currently selling at a price of 82.50 (82.50% of face value). The company wishes to sell a new a bond issue with a 30-year maturity. Their investment bank has advised that (1) the new 30-year issue could be sold for a flotation cost of 3% of face value, and (2) current yield curves indicate that...
A company has two different bonds currently outstanding. Both bonds have a face value of R100....
A company has two different bonds currently outstanding. Both bonds have a face value of R100. Bond A matures in 10 years. The bond makes no coupon payments for the first four years and then pays R8.50 semi-annually for the subsequent four years, and finally pays R10.50 semi-annually for the last two years. Bond B also matures in 10 years; it makes coupon payments of R4.50 semi-annually over its life. The yield to maturity on both bonds is 12% per...
Jack's construction Co. has 80,000 bonds outstanding that are selling at par value. Bonds with similar...
Jack's construction Co. has 80,000 bonds outstanding that are selling at par value. Bonds with similar characteristics are yielding 8.5%. The company alson has 4 million shares of common stock outstanding. the stock has a beta of 1.1 and sells for $40 a share. The U.S. Treasury bill is yielding 4% and the market risk premium is 8%. Jack's tax rate is 35%. What is Jack's weighted average cost of capital?
Parole Co. has 72,158 bonds outstanding that are selling at par value. The bonds yield 8.8...
Parole Co. has 72,158 bonds outstanding that are selling at par value. The bonds yield 8.8 percent. The company also has 4.7 million shares of common stock outstanding. The stock has a beta of 1.3 and sells for $46.8 a share. The U.S. Treasury bill is yielding 3.8 percent and the market risk premium is 7.8 percent. Parole's tax rate is 30 percent. What is the firm's weighted average cost of capital? Enter answer in percents. Use Excel and show...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT