Question

a. Kitchener Consumer Products plans to issue 25-year bonds with an 11.5 percent coupon rate, with coupons paid semi-annually and a par value of $1,000. After-tax flotation costs (issuing and underwriting costs) amount to 0.35 percent of par value. The firm’s tax rate is 50 percent. Determine the firm’s effective annual after-tax cost of debt.
b. Kitchener Consumer Products plans to issue $50 par preferred shares (P/S) with annual dividends of $3 (i.e., a 6-percent dividend yield). It estimates flotation costs to be $1 per share after taxes. Find the firm’s cost of P/S.
c. Kitchener Consumer Products wishes to make a new issue of common shares (C/S). The current market price (P0) is $25, D1 = $1.75 (expected dividend at the end of this year), while g = 6 percent per year indefinitely. Flotation costs and discounts amount to $1 per share after taxes. Find the firm’s cost of issuing new common shares
i. Using the dividend valuation approach.
ii. Using CAPM, given that the risk-free rate is 11 percent, the expected return on the market is 12 percent, and the beta for Kitchener Consumer Products is 0.95.
d. Find the cost of internally generated common equity
i. Using the dividend model approach.
ii. Using the CAPM approach.



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  • CreatedFebruary 25, 2015
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