Question

A) A bond that has ​$1,000 par value​ (face value) and a contract or coupon interest rate of 7 percent. A new issue would have a floatation cost of 8 percent of the ​$1,120 market value. The bonds mature in 12 years. The​ firm's average tax rate is 30 percent and its marginal tax rate is 37 percent. What's the firms after tax- cost of debt on the bond.

B) A new common stock issue that paid a ​$1.80 dividend last year. The par value of the stock is​ $15, and earnings per share have grown at a rate of 7 percent per year. This growth rate is expected to continue into the foreseeable future. The company maintains a constant​ dividend-earnings ratio of 30 percent. The price of this stock is now ​$26​, but 5 percent flotation costs are anticipated. Compute the cost of new equity.

C. Internal common equity when the current market price of the common stock is ​$43. The expected dividend this coming year should be ​$3.10​, increasing thereafter at an annual growth rate of 12 percent. The​ corporation's tax rate is 37 percent. Whats the cost of equity.

D) A preferred stock paying a dividend of 12 percent on a ​$150 par value. If a new issue is​ offered, flotation costs will be 15 percent of the current price of ​$171. The preferred stock cost is ?

E) A bond selling to yield 13 percent after flotation​ costs, but before adjusting for the marginal corporate tax rate of 37 percent. In other​ words, 13 percent is the rate that equates the net proceeds from the bond with the present value of the future cash flows​ (principal and​ interest). The after-tax cost of debt is?

Answer 1

You have asked 5 unrelated questions in the same post. I have addressed the first two. Please post the balance questions one by one separately.

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A)

FV = $ 1,000 par value​ (face value);

Since coupon payment frequency is not given, I am assuming it to be annual.

PMT = Coupon = 7% x FV = 7% x 1,000 = 70

F = flotation cost = 8%

PV = - Effective price of the bond = - Market value x (1 - F) = - ​$1,120 x (1 - 8%) =  - 1,030.40

Period = 12 years.

Pre tax cost of debt = YTM = RATE (Period, PMT, PV, FV) = RATE (12, 70, -1030.40, 1000) = 6.62%

marginal tax rate, T = 37%.

The firms after tax- cost of debt on the bond = Pre tax cost of debt x (1 - T) = 6.62% x (1 - 37%) = 4.17%

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B)

D0 = ​$1.80

g = 7%.

P = $26​

F = 5% percent flotation costs

The cost of new equity = D0 x (1 + g) / [P x (1 - F)] + g = 1.80 x (1 + 7%) / [26 x (1 - 5%)] + 7% = 14.80%

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Please post the balance questions one by one separately.