Debt The firm can raise debt by selling $1,000-par-value, 4% coupon interest rate, 12-year bonds on...

 

Transcribed Image Text:

Debt The firm can raise debt by selling $1,000-par-value, 4% coupon interest rate, 12-year bonds on which annual interest payments will be made. To sell the issue, an average discount of $20 per bond would have to be given. The firm also must pay flotation costs of $20 per bond. Preferred stock The firm can sell 7% preferred stock at its $95-per-share par value. The cost of issuing and selling the preferred stock is expected to be $7 per share. Preferred stock can be sold under these terms. Common stock The firm's common stock is currently selling for $90 per share. The firm expects to pay cash dividends of $7.5 per share next year. The firm's dividends have been growing at an annual rate of 8%, and this growth is expected to continue into the future. The stock must be underpriced by $6 per share, and flotation costs are expected to amount to $6 per share. The firm can sell new common stock under these terms. Retained earnings When measuring this cost, the firm does not concern itself with the tax bracket or brokerage fees of owners. It expects to have available $110,000 of retained earnings in the coming year; once these retained earnings are exhausted, the firm will use new common stock as the form of common stock equity financing. a. Calculate the after-tax cost of debt. b. Calculate the cost of preferred stock. c. Calculate the cost of common stock. d. Calculate the firm's weighted average cost of capital using the capital structure weights shown in the following table, . (Round answer to the nearest 0.01%) a. The after-tax cost of debt using the approximation formula is %. (Round to two decimal places.) - X Data Table The after-tax cost of debt using the bond's yield to maturity (YTM) is %. (Round to two decimal places.) b. The cost of preferred stock is %. (Round to two decimal places.) (Click on the icon here D in order to copy the contents of the data table below c. The cost of retained earnings is (Round to two decimal places.) into a spreadsheet.) Source of capital Weight The cost of new common stock is %. (Round to two decimal places.) Long-term debt 20% Preferred stock 25 d. Using the cost of retained earnings, the firm's WACC is %. (Round to two decimal places.) Common stock equity 55 Using the cost of new common stock, the firm's WACC is %. (Round to two decimal places.) Total 100% Print Done Debt The firm can raise debt by selling $1,000-par-value, 4% coupon interest rate, 12-year bonds on which annual interest payments will be made. To sell the issue, an average discount of $20 per bond would have to be given. The firm also must pay flotation costs of $20 per bond. Preferred stock The firm can sell 7% preferred stock at its $95-per-share par value. The cost of issuing and selling the preferred stock is expected to be $7 per share. Preferred stock can be sold under these terms. Common stock The firm's common stock is currently selling for $90 per share. The firm expects to pay cash dividends of $7.5 per share next year. The firm's dividends have been growing at an annual rate of 8%, and this growth is expected to continue into the future. The stock must be underpriced by $6 per share, and flotation costs are expected to amount to $6 per share. The firm can sell new common stock under these terms. Retained earnings When measuring this cost, the firm does not concern itself with the tax bracket or brokerage fees of owners. It expects to have available $110,000 of retained earnings in the coming year; once these retained earnings are exhausted, the firm will use new common stock as the form of common stock equity financing. a. Calculate the after-tax cost of debt. b. Calculate the cost of preferred stock. c. Calculate the cost of common stock. d. Calculate the firm's weighted average cost of capital using the capital structure weights shown in the following table, . (Round answer to the nearest 0.01%) a. The after-tax cost of debt using the approximation formula is %. (Round to two decimal places.) - X Data Table The after-tax cost of debt using the bond's yield to maturity (YTM) is %. (Round to two decimal places.) b. The cost of preferred stock is %. (Round to two decimal places.) (Click on the icon here D in order to copy the contents of the data table below c. The cost of retained earnings is (Round to two decimal places.) into a spreadsheet.) Source of capital Weight The cost of new common stock is %. (Round to two decimal places.) Long-term debt 20% Preferred stock 25 d. Using the cost of retained earnings, the firm's WACC is %. (Round to two decimal places.) Common stock equity 55 Using the cost of new common stock, the firm's WACC is %. (Round to two decimal places.) Total 100% Print Done

Answer rating: 100% (QA)

Solution a After TaxCost of Debt with floatation cost when Bonds are issued at discount is given by the formula Where Kd AfterTax Cost of Debt RV Real... View the full answer