Briefly discuss current bond yields (any type: treasury, corporate...) 2. The capital structure for ABC Co. is
Question:
Briefly discuss current bond yields (any type: treasury, corporate...)
2. The capital structure for ABC Co. is 50% debt, 10% preferred stock, 40% equity.
•ABC has 20-years to maturity bonds with a $1,000 par value, Net proceeds of $990 and 8% annual coupon interest rate. Tax 40%.
•Outstanding preferred stock pays an 8% dividend and has a $100-per-share par value.
•ABC does not currently pay a dividend to common stockholders.
•In order to track the cost of common stock the CFO uses the capital asset pricing model (CAPM). The CFO and the firm's investment advisors believe that the appropriate risk-free rate is 3% and that the market's expected return equals 11%. Beta is 1.3.
a.Calculate ABC's current after-tax cost of long-term debt.
b.Calculate ABC's current cost of preferred stock.
c.Calculate ABC's current cost of common stock.
d.Calculate ABC's current weighted average cost capital.
3. Debt is typically either via loans or bonds. The tax effect is always accounted for in calculating cost of capital. Typical problem progression calcualte the after tax cost of debt for the below. Use tax rate of 30%.
Show your inputs.
a. Bond selling price $1000, flotation costs $15, 20 year maturity. Par $1000. 4% coupon
b. Bond selling price $1000, flotation costs $15, 15 year maturity. Par $1000. 4% coupon
c. Bond selling price $1000, flotation costs $15, 10 year maturity. Par $1000. 4% coupon
d. Loan at a stated rate of 5%
e. Loan at a stated rate of 6%
Foundations of Finance The Logic and Practice of Financial Management
ISBN: 978-0132994873
8th edition
Authors: Arthur J. Keown, John D. Martin, J. William Petty