Intro Greenberg Corp. is considering opening a subsidiary to expand its operations. To evaluate the proposal,...

Transcribed Image Text:

Intro Greenberg Corp. is considering opening a subsidiary to expand its operations. To evaluate the proposal, the company needs to calculate its cost of capital. You've collected the following information: 0 The firm has one bond outstanding with a coupon rate of 8%, paid semi-annually, 10 years to maturity and a current price of $1,148.77, implying a yield to maturity of 6%. The firm's preferred stock pays an annual dividend of $1.35 forever, and each share is currently worth $86. New bonds and preferred stock would be issued by private placement, largely eliminating flotation costs. Greenberg's beta is 0.8, the yield on Treasury bonds is is 2.8% and the expected market risk premium is 6%. The current stock price is $26.78. The firm has just paid an annual dividend of $0.78, which is expected to grow by 3% per year. The firm uses a risk premium of 4% for the bond-yield-plus-risk-premium approach. New equity would come from retained earnings, thus eliminating flotation costs. The firm has marginal tax rate of 34%. 0 The company wants to maintain is current capital structure, which is 70% equity, 10% preferred stock and 20% debt. Part 1 What is the (pre-tax) cost of debt? 3+ decimals Submit Attempt 2/10 for 10 pts. Intro Greenberg Corp. is considering opening a subsidiary to expand its operations. To evaluate the proposal, the company needs to calculate its cost of capital. You've collected the following information: 0 The firm has one bond outstanding with a coupon rate of 8%, paid semi-annually, 10 years to maturity and a current price of $1,148.77, implying a yield to maturity of 6%. The firm's preferred stock pays an annual dividend of $1.35 forever, and each share is currently worth $86. New bonds and preferred stock would be issued by private placement, largely eliminating flotation costs. Greenberg's beta is 0.8, the yield on Treasury bonds is is 2.8% and the expected market risk premium is 6%. The current stock price is $26.78. The firm has just paid an annual dividend of $0.78, which is expected to grow by 3% per year. The firm uses a risk premium of 4% for the bond-yield-plus-risk-premium approach. New equity would come from retained earnings, thus eliminating flotation costs. The firm has marginal tax rate of 34%. 0 The company wants to maintain is current capital structure, which is 70% equity, 10% preferred stock and 20% debt. Part 1 What is the (pre-tax) cost of debt? 3+ decimals Submit Attempt 2/10 for 10 pts.