Huron LTD has the following capital structure: 

Bonds $12,000,000 

Preferred shares 3,000,000 

Common shares 32,000,000 

Retained earnings 8,000,000 $55,000,000 

The existing bonds have a coupon rate of 8 percent with 25 years left to maturity, but new 25-year bonds to be sold at par ($1,000) will have a coupon rate of 10 percent. After tax flotation costs of 5 percent would be expected on the new issue. The existing preferred shares have a $50 par value and an annual dividend rate of 12 percent. New preferred shares could be issued at a $60 par value with a 14 percent dividend rate. Flotation costs would be 4 percent after tax. There are 10,000,000 common shares outstanding that currently trade at $10 per share and paid a dividend of $0.25 last year. During the last 7 years Huron has enjoyed steady growth, with common stock dividends growing from $0.25 to $0.55. New shares would be issued at a 10% discount from the current market price and would require after-tax flotation expenses of 5 percent. Huron’s tax rate is 30 percent and would require the sale of new common shares to fund new investments. 

REQUIRED: a. Calculate the firm’s after-tax cost of new debt. (2 marks) 

b. Calculate the firm’s after-tax cost of new preferred stock. (2 marks)

 c. Calculate the firm’s after-tax cost of retained earnings (internal funds). (2 marks) 

d. Calculate the firm’s after-tax cost of new common shares. (2 marks) 

e. Calculate the market value of the firm’s outstanding bonds, Preferred shares and common stock. (3 marks)

Answer rating: 100% (QA)

a Aftertax cost of new debt 81030 56 b Aftertax cost of new pref... View the full answer