In: Finance
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?
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.