(Individual or component costs of capital) Compute the cost of the following: a. A bond that...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
(Individual or component costs of capital) Compute the cost of the following: a. A bond that has $1,000 par value (face value) and a contract or coupon interest rate of 8 percent. A new issue would have a floatation cost of 6 percent of the $1,120 market value. The bonds mature in 8 years. The firm's average tax rate is 30 percent and its marginal tax rate is 22 percent. b. A new common stock issue that paid a $1.50 dividend last year. The par value of the stock is $15, and earnings per share have grown at a rate of 9 percent per year. This growth rate is expected to continue into the foreseeable future. The company maintains a constant dividend-earnings ratio of 30 percent. The price of this stock is now $27, but 9 percent flotation costs are anticipated. c. Internal common equity when the current market price of the common stock is $46. The expected dividend this coming year should be $3.10, increasing thereafter at an annual growth rate of 7 percent. The corporation's tax rate is 22 percent. d. A preferred stock paying a dividend of 8 percent on a $120 par value. If a new issue is offered, flotation costs will be 13 percent of the current price of $161. e. A bond selling to yield 12 percent after flotation costs, but before adjusting for the marginal corporate tax rate of 22 percent. In other words, 12 percent is the rate that equates the net proceeds from the bond with the present value of the future cash flows (principal and interest). (Individual or component costs of capital) Compute the cost of the following: a. A bond that has $1,000 par value (face value) and a contract or coupon interest rate of 8 percent. A new issue would have a floatation cost of 6 percent of the $1,120 market value. The bonds mature in 8 years. The firm's average tax rate is 30 percent and its marginal tax rate is 22 percent. b. A new common stock issue that paid a $1.50 dividend last year. The par value of the stock is $15, and earnings per share have grown at a rate of 9 percent per year. This growth rate is expected to continue into the foreseeable future. The company maintains a constant dividend-earnings ratio of 30 percent. The price of this stock is now $27, but 9 percent flotation costs are anticipated. c. Internal common equity when the current market price of the common stock is $46. The expected dividend this coming year should be $3.10, increasing thereafter at an annual growth rate of 7 percent. The corporation's tax rate is 22 percent. d. A preferred stock paying a dividend of 8 percent on a $120 par value. If a new issue is offered, flotation costs will be 13 percent of the current price of $161. e. A bond selling to yield 12 percent after flotation costs, but before adjusting for the marginal corporate tax rate of 22 percent. In other words, 12 percent is the rate that equates the net proceeds from the bond with the present value of the future cash flows (principal and interest).
Expert Answer:
Posted Date:
Students also viewed these finance questions
-
For urban children in India, work opportunities are few. What would you expect to see happen to the urban-rural gap in test scores in high rainfall periods?
-
Describe the 10% asset test for determining reportable segments.
-
All of the following are general requirements for compliance with laws and regulations except a. Freedom of information. b. Political activity. c. Civil rights. d. Cash management.
-
Effects.of an Inventory Error} The statements of earnings for Graul Corporation for the three years ended in 2018 appear below. During 2018, Graul discovered that the 2016 ending inventory had been...
-
Coren Chemical, Inc., develops industrial chemicals that are used by other manufacturers to produce photographic chemicals, preservatives, and lubricants. One of their products, K-1000, is used by...
-
A company purchased factory equipment for $ 5 1 0 0 0 0 . It is estimated that the equipment will have a $ 5 1 0 0 0 salvage value at the end of its estimated 1 0 - year useful life. If the company...
-
Develop a media plan that supports the planned marketing campaign. Include: a media budget, recommendations and rationale for the selected and integrated multi-media activities within the set budget...
-
A small pastry business is in the process of creating ads within their Display campaign. They find that there are two main ad formats that they can use.
-
Your boss has recently assigned you the task of creating a team of qualified individuals to tackle a complex project that will require technical expertise, domain knowledge, and collaboration....
-
2. Discuss what successful relationship management experience is and why it is important when working on supplier development. Why should there be such an emphasis on suppliers in a firm's...
-
How was Bose successful in preventing NFL players from wearing Beats headsets during NFL games?
-
There is an event application lifecycle process. Explain this process, including the different phases of the application process.
-
Unit 5 Discussion: Impact of Risk-free Rates and Market Premiums Please consider all that we have learned thus far regarding the impact of diversification, risk-free securities, and market...
-
If your school has a subscription to the FASB Codification, go to aaahq.org/ ascLogin.cfm to log in and prepare responses to the following. (a) What is the stock dividend? (b) What is a stock split?...
-
Prepare and use contribution margin statements for dropping a line decision (Learning Objective 4) The following operating income data of Abalone Seafood highlight the losses of the fresh seafood...
-
Product mix under constraint (Learning Objective 5) Easy Living of Charlotte, North Carolina, specializes in outdoor furniture and spas. Owner Linda Spring is expanding the store. She is deciding...
-
Outsourcing: alternative use of capacity (Learning Objective 6) Morning Grain makes organic cereal. Costs of producing 140,000 boxes of cereal each year follow: Suppose Kelloggs will sell Morning...
Study smarter with the SolutionInn App