a. Kitchener Consumer Products plans to issue 25-year bonds with an 11.5 percent coupon rate, with coupons

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.

Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a... Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their... Expected Return
The expected return is the profit or loss an investor anticipates on an investment that has known or anticipated rates of return (RoR). It is calculated by multiplying potential outcomes by the chances of them occurring and then totaling these... Par Value
Par value is the face value of a bond. Par value is important for a bond or fixed-income instrument because it determines its maturity value as well as the dollar value of coupon payments. The market price of a bond may be above or below par,...