Question

Information on Power Green, Inc., is shown below. Assume the company’s tax rate is 38%.

Debt:		8,800 8.1% coupon bonds outstanding, $1,000 par value, selling for 103.5% of par, and YTM of 7.7%.
Common stock:		213,000 shares outstanding, selling for $83.30 per share; beta is 1.18.
Preferred stock:		12,300 shares of 5.9% preferred stock outstanding, currently selling for $97.70 per share.
Market:		7.15% market risk premium and 4.95% risk-free rate.

1. What is the company's cost of Equity (Common Stock) financing?

1. What is the company's cost of Preferred Stock financing?

1. What is the company's cost of Debt (After Tax) financing?

(express your answers as percentages rounded to two decimal places. Do not show the % sign. e.g. 12.34%)

Answer 1

1) Cost of equity

> Formula

Ke = Rf + ( Rm - Rf ) * B

where

• Rf = Risk free rate
• Ke = cost of equity
• Rm = Market returns
• B = Beta

> Calculation

Ke = Rf + ( Rm - Rf ) * B

      = 4.95 + 7.15 * 1.18

      = 13.387 % Answer

2) Cost of preferred Stock

Cost = Divident / Market Price

        = [ 5.9% * 100 ] / 97.70

       = 0.06039 or 6.039% Answer

3) Cost of Debt

> Formula = Coupen Amount * ( 1 - Tax Rate ) / Market Price

                 = [ (8.1% * 1000) * ( 1 - 0.38 ) ] / ( 103.50% * 1000 )

                = [ 81 * 0.62 ] / 1035

                = 4.8522 % Answer

Hope you understand the solution.

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