1. Why is the Cost of Retained Earnings the equivalent of the firm's own required rate...

 

 

Transcribed Image Text:

1. Why is the Cost of Retained Earnings the equivalent of the firm's own required rate of return on common stock? (1pt) 2. Calculate the after-tax cost of debt under each of the following conditions. (1pt each) a. Yield 8.0% b. 12.0% C. 10.6% Corporate Tax Rate 18% 34% 15% 3. Walsh's Sporting Goods can sell preferred stock for $70 with an estimated flotation cost of $2.50. It is anticipated that the preferred stock will pay $6 per share in dividends. (1pt each) a. Compute the cost of preferred stock for Walsh's. b. Do we need to make a tax adjustment for the issuing firm? 4. The treasurer of Gatoraide, Inc. is asked to compute the cost of fixed income securities for her corporation. Before making the calculations, she assumes the after-tax cost of debt is at least 2 percent less than that for preferred stock. Based on the following facts, is she correct? (1pt) FACTS: Debt can be issued at a yield of 11 percent, and the corporate tax rate is 30 percent. Preferred stock will be priced at $50 and pay a dividend of $4.80. The floatation cost on the preferred stock is $2.10. 5. Compute Ke and Kn under the following circumstances for EACH letter below (.5pts each) a. D $4.20, Po= $55, g = 5%, F = $3.80. b. D $0.40, Po = $15, g = 8%, F = $1. c. E (earnings at the end of period one) = $8; payout ratio equals 25 percent; Po = $32; g 5%; F = $2. (hint: need to calculate D first) 6. Given the following information, calculate the weighted average cost of capital (WACC) for Hamilton Home Runs, Inc. You can use the process shown in class to line up the calculations. Percent of capital structure (weights) (1.5pts) Debt...... Preferred stock Common equity. 30% 15 55 Additional information: Bond coupon rate.. 13% Bond yield to maturity. Dividend, expected common 11% (hint: use this in Ka formula) $3.00 Dividend, preferred. $10.00 Price, common $50.00 Price, preferred.. $98.00 Flotation cost, preferred. $5.50 Growth rate. 8% Corporate tax rate.. 30% 1. Why is the Cost of Retained Earnings the equivalent of the firm's own required rate of return on common stock? (1pt) 2. Calculate the after-tax cost of debt under each of the following conditions. (1pt each) a. Yield 8.0% b. 12.0% C. 10.6% Corporate Tax Rate 18% 34% 15% 3. Walsh's Sporting Goods can sell preferred stock for $70 with an estimated flotation cost of $2.50. It is anticipated that the preferred stock will pay $6 per share in dividends. (1pt each) a. Compute the cost of preferred stock for Walsh's. b. Do we need to make a tax adjustment for the issuing firm? 4. The treasurer of Gatoraide, Inc. is asked to compute the cost of fixed income securities for her corporation. Before making the calculations, she assumes the after-tax cost of debt is at least 2 percent less than that for preferred stock. Based on the following facts, is she correct? (1pt) FACTS: Debt can be issued at a yield of 11 percent, and the corporate tax rate is 30 percent. Preferred stock will be priced at $50 and pay a dividend of $4.80. The floatation cost on the preferred stock is $2.10. 5. Compute Ke and Kn under the following circumstances for EACH letter below (.5pts each) a. D $4.20, Po= $55, g = 5%, F = $3.80. b. D $0.40, Po = $15, g = 8%, F = $1. c. E (earnings at the end of period one) = $8; payout ratio equals 25 percent; Po = $32; g 5%; F = $2. (hint: need to calculate D first) 6. Given the following information, calculate the weighted average cost of capital (WACC) for Hamilton Home Runs, Inc. You can use the process shown in class to line up the calculations. Percent of capital structure (weights) (1.5pts) Debt...... Preferred stock Common equity. 30% 15 55 Additional information: Bond coupon rate.. 13% Bond yield to maturity. Dividend, expected common 11% (hint: use this in Ka formula) $3.00 Dividend, preferred. $10.00 Price, common $50.00 Price, preferred.. $98.00 Flotation cost, preferred. $5.50 Growth rate. 8% Corporate tax rate.. 30%

Answer rating: 100% (QA)

1 The cost of retained earnings is equivalent to the firms own required rate of return on common stock because retained earnings represent the internally generated funds that could have been distribut... View the full answer