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In: Finance

A) Alpha Inc. perpetual preferred stock is selling for $100 pershare and has a par...

A) Alpha Inc. perpetual preferred stock is selling for $100 per share and has a par value of $150. It pays a constant dividend of 8.0%. The firm’s marginal tax rate is 40%. What is the cost of preferred stock?

A. 5.33%

B. 7.20%

C. 12.00%

B) Alpha Inc. common stock is selling for $50 per share. The beta of the stock is 1.75 and the risk-free rate is 3.0%. The expected return on the market is 7.0%. The firm’s marginal tax rate is 35%. What is the cost of common equity?

A. 6.5%

B. 10.0%

C. 15.25%

Solutions

Expert Solution

cost of preferred stock is computed as follows:

= (Dividend rate x Par value) / selling price

= (8% x $ 150) / $ 100

= $ 12 / $ 100

= 12%

cost of common equity is computed as follows:

= Risk free rate + Beta x (return on market - risk free rate)

= 3% + 1.75 x (7% - 3%)

= 3% + 1.75 x 4%

= 10.0%

jeff jeffy answered 2 years ago
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