Question

In: Finance

A) A bond that has ​$1,000 par value​ (face value) and a contract or coupon interest...

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?

Solutions

Expert Solution

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.

---------------------

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%

------------------------------------------------------

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%

-------------------------

Please post the balance questions one by one separately.


Related Solutions

A $1,000 par value bond has a coupon interest rate of 6 percent. The interest payment...
A $1,000 par value bond has a coupon interest rate of 6 percent. The interest payment is ? a. $160 b. $6 c. need to know the maturity date d. $60
A bond that matures in 13 years has a ​$1,000 par value. The annual coupon interest...
A bond that matures in 13 years has a ​$1,000 par value. The annual coupon interest rate is 11 percent and the​ market's required yield to maturity on a​ comparable-risk bond is 17 percent. a. What would be the value of this bond if it paid interest​ annually? b. What would be the value of this bond if it paid interest​ semiannually?
29. A coupon bond that pays interest annually has a par value of $1,000, matures in...
29. A coupon bond that pays interest annually has a par value of $1,000, matures in 5 years, and has a yield to maturity of 10%. The intrinsic value of the bond today will be ______ if the coupon rate is 7%. A) $712.99 B) $620.92 C) $1,123.01 D) $886.28 E) $1,000.00 30. A coupon bond that pays interest annually, has a par value of $1,000, matures in 5 years, and has a yield to maturity of 10%. The intrinsic...
A coupon bond that pays interest of $60 annually has a par value of $1,000, matures...
A coupon bond that pays interest of $60 annually has a par value of $1,000, matures in 5 years, and is selling today at a $75.25 premium from par value. The current yield on this bond is _________.
A bond that matures in 14 years has a $1,000 par value. The annual coupon interest...
A bond that matures in 14 years has a $1,000 par value. The annual coupon interest rate is 11 percent and the​ market's required yield to maturity on a​ comparable-risk bond is 14 percent. What would be the value of this bond if it paid interest​ annually? What would be the value of this bond if it paid interest​ semiannually? The value of this bond if it paid interest annually would be$ _____ The value of this bond if it...
A bond that matures in 18 years has a ​$1,000 par value. The annual coupon interest...
A bond that matures in 18 years has a ​$1,000 par value. The annual coupon interest rate is 14 percent and the​ market's required yield to maturity on a​ comparable-risk bond is 15 percent. What would be the value of this bond if it paid interest​ annually? What would be the value of this bond if it paid interest​ semiannually?
A bond that matures in 19 years has a ​$1,000 par value. The annual coupon interest...
A bond that matures in 19 years has a ​$1,000 par value. The annual coupon interest rate is 12 percent and the​ market's required yield to maturity on a​ comparable-risk bond is 17 percent. What would be the value of this bond if it paid interest​ annually? What would be the value of this bond if it paid interest​ semiannually?
A bond that matures in 12 years has a $1,000 par value. The annual coupon interest...
A bond that matures in 12 years has a $1,000 par value. The annual coupon interest rate is 11 percent and the market's required yield to maturity on a comparable-risk bond is 18 percent. What would be the value of this bond if it paid interest annually? What would be the value of this bond if it paid interest semiannually?
A bond that matures in 8 years has a ​$1,000 par value. The annual coupon interest...
A bond that matures in 8 years has a ​$1,000 par value. The annual coupon interest rate is 14 percent and the​ market's required yield to maturity on a​ comparable-risk bond is 17 percent. What would be the value of this bond if it paid interest​ annually? What would be the value of this bond if it paid interest​ semiannually?
A 7 percent coupon bond has a face value of $1,000 and pays interest annually. The...
A 7 percent coupon bond has a face value of $1,000 and pays interest annually. The current yield is 7.3 percent. What is the current price of this bond?
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT