1. (Cost of debt) Belton is issuing a $1,000 par value bond that pays 7 percent...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
1. (Cost of debt) Belton is issuing a $1,000 par value bond that pays 7 percent annual interest and matures in 15 years. Investors are willing to pay $958 for the bond. Flotation costs will be 11 percent of market value. The company is in an 18 percent tax bracket. What will be the firm's after-tax cost of debt on the bond? 2. (Cost of preferred stock) The preferred stock of Julian Industries sells for $36 and pays $3.00 in dividends. The net price of the security after issuance costs is $32.50. What is the cost of capital for the preferred stock? 3. (Cost of debt) The Zephyr Corporation is contemplating a new investment to be financed 33 percent from debt. The firm could sell new $1,000 par value bonds at a net price of $945. The couponi interest rate is 12 percent, and the bonds would mature in 15 years. If the company is in a 34 percent tax bracket, what is the after-tax cost of capital to Zephyr for bonds? 4. (Cost of preferred stock) Your firm is planning to issue preferred stock. The stock sells for $115; however, if new stock is issued, the company would receive only $98. The par value of the stock is $100, and the dividend rate is 14 percent. What is the cost of capital for the stock to your firm? 5. (Cost of internal equity) Pathos Co.'s common stock is currently selling for $23.80. Dividends paid last year were $0.70. Flotation costs on issuing stock will be 10 percent of market price. The dividends and earnings per share are projected to have an annual growth rate of 15 percent. What is the cost of internal common equity for Pathos? 6. (Cost of equity) The common stock for the Bestsold Corporation sells for $58. If a new issue is sold, the flotation costs are estimated to be 8 percent. The company pays 50 percent of its earnings in dividends, and a $4 dividend was recently paid. Earnings per share 5 years ago were $5. Earnings are expected to continue to grow at the same annual rate in the future as during the past 5 years. The firm's marginal tax rate is 34 percent. Calculate the cost of (a) internal common equity and (b) external com- mon equity. 7. (Cost of debt) Sincere Stationery Corporation needs to raise $500,000 to improve its manufac- turing plant. It has decided to issue a $1,000 par value bond with a 14 percent annual coupon rate and a 10-year maturity. The investors require a 9 percent rate of return. a. Compute the market value of the bonds. b. What will the net price be if flotation costs are 10.5 percent of the market price? c. How many bonds will the firm have to issue to receive the needed funds? d. What is the firm's after-tax cost of debt if its average tax rate is 25 percent and its marginal tax rate is 34 percent? 8. (Cost of debt) a. Rework Problem 7 as follows: Assume an 8 percent coupon rate. What effect does changing the coupon rate have on the firm's after-tax cost of capital? 1. (Cost of debt) Belton is issuing a $1,000 par value bond that pays 7 percent annual interest and matures in 15 years. Investors are willing to pay $958 for the bond. Flotation costs will be 11 percent of market value. The company is in an 18 percent tax bracket. What will be the firm's after-tax cost of debt on the bond? 2. (Cost of preferred stock) The preferred stock of Julian Industries sells for $36 and pays $3.00 in dividends. The net price of the security after issuance costs is $32.50. What is the cost of capital for the preferred stock? 3. (Cost of debt) The Zephyr Corporation is contemplating a new investment to be financed 33 percent from debt. The firm could sell new $1,000 par value bonds at a net price of $945. The couponi interest rate is 12 percent, and the bonds would mature in 15 years. If the company is in a 34 percent tax bracket, what is the after-tax cost of capital to Zephyr for bonds? 4. (Cost of preferred stock) Your firm is planning to issue preferred stock. The stock sells for $115; however, if new stock is issued, the company would receive only $98. The par value of the stock is $100, and the dividend rate is 14 percent. What is the cost of capital for the stock to your firm? 5. (Cost of internal equity) Pathos Co.'s common stock is currently selling for $23.80. Dividends paid last year were $0.70. Flotation costs on issuing stock will be 10 percent of market price. The dividends and earnings per share are projected to have an annual growth rate of 15 percent. What is the cost of internal common equity for Pathos? 6. (Cost of equity) The common stock for the Bestsold Corporation sells for $58. If a new issue is sold, the flotation costs are estimated to be 8 percent. The company pays 50 percent of its earnings in dividends, and a $4 dividend was recently paid. Earnings per share 5 years ago were $5. Earnings are expected to continue to grow at the same annual rate in the future as during the past 5 years. The firm's marginal tax rate is 34 percent. Calculate the cost of (a) internal common equity and (b) external com- mon equity. 7. (Cost of debt) Sincere Stationery Corporation needs to raise $500,000 to improve its manufac- turing plant. It has decided to issue a $1,000 par value bond with a 14 percent annual coupon rate and a 10-year maturity. The investors require a 9 percent rate of return. a. Compute the market value of the bonds. b. What will the net price be if flotation costs are 10.5 percent of the market price? c. How many bonds will the firm have to issue to receive the needed funds? d. What is the firm's after-tax cost of debt if its average tax rate is 25 percent and its marginal tax rate is 34 percent? 8. (Cost of debt) a. Rework Problem 7 as follows: Assume an 8 percent coupon rate. What effect does changing the coupon rate have on the firm's after-tax cost of capital?
Expert Answer:
Answer rating: 100% (QA)
Sr No Investment Invested For Years Compounding Period Per Annum Rate of Return ... View the full answer
Related Book For
Foundations Of Finance
ISBN: 9780135160619
10th Edition
Authors: Arthur J. Keown, John H. Martin, J. William Petty
Posted Date:
Students also viewed these finance questions
-
Belton is issuing a $ 1,000 par value bond that pays 7 percent annual interest and matures in 15 years. Investors are willing to pay $ 958 for the bond. Flotation costs will be 11 percent of market...
-
Suppose you purchase a $5,000 bond that pays 7 percent interest annually and matures in five years. If the inflation rate in recent years has been steady at 3 percent annually, what is the estimated...
-
High-income people are willing to pay more than lower-income people to avoid the risk of death. For example, they are more likely to pay for safety features on cars. Do you think costbenefit analysts...
-
The shear shown is used to trim electronic-circuit-board laminates. Neglecting the thickness of the shearing blade and knowing that a vertical 3-kN shearing force at E is required to cut the...
-
Assuming the country is open to international capital flows, which of the following combinations of monetary and exchange-rate policies are viable? Explain your reasoning. (a) A domestic interest...
-
Palm Corporation and Staple Company have announced terms of an exchange agreement under which Palm will issue 8,000 shares of its $10 par value common stock to acquire all of Staple Companys assets....
-
Describe the Spiral Development Model, its characteristics, and shortcomings.
-
Susan and Stan Collins live in Iowa, are married and have two children ages 6 and 10. In 2014, Susans adjusted gross income is $38,000 and Stans is $12,000 and both are self-employed. They also have...
-
This is a major ethical dilemma, in which AI systems may not be able to provide a truly neutral and fair system, thereby raising ethical concerns. If artificial intelligence tools are going to be...
-
As loan analyst for Murray Bank, you have been given the following information. Each of these companies has requested a loan of 50,000 for 6 months with no collateral offered. Since your bank has...
-
Read the scenario below then answer the questions that follow. Contracts are of critical importance, especially in daily commercial and business transactions. Agreements are constantly being entered...
-
2 . Call Options Payoff and Profit ( 2 0 points ) A European Call option is selling for $ 3 with an exercise price of $ 5 0 , the underlying at expiration is $ 5 3 . Determine the following option...
-
Mainline Clinic, a for - profit business, had revenues of $ 1 1 . 3 million last year. Expenses other than depreciation totaled 6 3 percent of revenues, and depreciation expense was $ 1 . 3 million....
-
3. Wilk Productions has $23.4 per share earnings; the benchmark P/E ratio is 10.2. I a. Estimate the value of its stocks today. b. If earnings are expected to grow at 3.5 percent per year, what is...
-
During the first quarter of 2 0 1 5 , Toronto Dominion Bank ( TD ) stock cost $ 4 5 per share and was expected to yield 4 % per year in dividends, while CNA Financial Corp. ( CNA ) stock cost $ 4 0...
-
What is the dividend yield for a stock that is priced $ 3 0 , the required return is 5 % and the growth rate is 2.9 % ?
-
Chapter 6 Lab Methods Lab Objectives Be able to declare a new class Be able to write the constructor Be able to write instance methods that return a value Be able to instantiate an object Be able to...
-
Using Apple, demonstrate how the differentiation strategy can be well implemented.
-
If Raines Company earned $280,000 in net income, and paid cash dividends of $40,000, what are Rainess earnings per share if it has 80,000 shares outstanding?
-
How do we measure the beta of a portfolio?
-
Break-even analysis assumes linear revenue and cost functions. In reality, these functions may not always be linear over large output and sales levels. Why?
-
In a vapour compression refrigeration system, the condition of refrigerant before entering the compressor is (a) saturated liquid (b) wet vapour (c) dry saturated liquid (d) superheated vapour
-
The highest temperature during the cycle in vapour compression refrigeration system occurs after (a) compression (b) condensation (c) expansion (d) evaporation
-
During a refrigeration cycle, heat is rejected by the refrigerant in (a) compressor (b) condenser (c) evaporator (d) expansion valve
Study smarter with the SolutionInn App