Nest Company currently has outstanding bonds that pay RM100 coupon interest and the yield to maturity...
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Nest Company currently has outstanding bonds that pay RM100 coupon interest and the yield to maturity (YTM) is 12%. Nest believes it could issue new bonds at par that would provide a similar yield to maturity. Meanwhile, Nest can issue perpetual preferred stock at RM37.50 per share. The stock would pay a constant annual dividend of RM2.80 a share. Required: (a) If its marginal tax rate is 40%, what is Nest's after-tax cost of debt? Marks) (b) What is the company's cost of preferred stock, r₂? (5 (5 Marks) (c) What is Nest's cost of common equity if the capital structure of Nest is 40% debt and 60% common equity, with no preferred stock? If the WACC is estimated at 9.96 (5 Marks) (d) Discuss the factors that might affect the accuracy of the WACC measurement (5 Marks) Nest Company currently has outstanding bonds that pay RM100 coupon interest and the yield to maturity (YTM) is 12%. Nest believes it could issue new bonds at par that would provide a similar yield to maturity. Meanwhile, Nest can issue perpetual preferred stock at RM37.50 per share. The stock would pay a constant annual dividend of RM2.80 a share. Required: (a) If its marginal tax rate is 40%, what is Nest's after-tax cost of debt? Marks) (b) What is the company's cost of preferred stock, r₂? (5 (5 Marks) (c) What is Nest's cost of common equity if the capital structure of Nest is 40% debt and 60% common equity, with no preferred stock? If the WACC is estimated at 9.96 (5 Marks) (d) Discuss the factors that might affect the accuracy of the WACC measurement (5 Marks)
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Answer rating: 100% (QA)
a To calculate Nests aftertax cost of debt we need to consider the tax deductibility of interest payments The aftertax cost of debt can be calculated ... View the full answer
Related Book For
Foundations of Financial Management
ISBN: 978-1259024979
10th Canadian edition
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen, Doug Short, Michael Perretta
Posted Date:
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