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10. An overview of a firm's cost of debt The before-tax cost of debt is the interest rate that a firm pays on any new debt financing. Omni Consumer Products Company (OCP) can borrow funds at an interest rate of 7.30% for a period of four years. Its marginal federal-plus-state tax rate is 25%. OCP's after-tax cost of debt is (rounded to two decimal places). At the present time, Omni Consumer Products Company (OCP) has 20-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have a current market price of $1,382.73 per bond, carry a coupon rate of 13%, and distribute annual coupon payments. The company incurs a federal-plus-state tax rate of 25%. If OCP wants to issue new debt, what would be a reasonable estimate for its after-tax cost of debt (rounded to two decimal places)? (Note: Round your YTM rate to two decimal place.) 6.64% O 7.97% 7.64% 5.98% 11. The cost of preferred stock Preferred stock is a hybrid security, because it has some characteristics typical of debt and others typical of equity. The following table lists various characteristics of preferred stock. Determine which of these characteristics is consistent with debt and which is consistent with equity. Characteristics Debt Equity Dividends are fixed. Usually has no specified maturity date. Consider the case of Bogdan Enterprises: At the present time, Bogdan Enterprises does not have any preferred stock outstanding but is looking to include preferred stock in its capital structure in the future. Bogdan has found some institutional investors that are willing to purchase its preferred stock issue provided that it pays a perpetual dividend of $13 per share. If the investors pay $100.15 per share for their investment, then Bogdan's cost of preferred stock (rounded to four decimal places) will be 12. The cost of retained earnings The cost of raising capital through retained earnings is the cost of raising capital through issuing new common stock. The cost of equity using the CAPM approach The current risk-free rate of return (TRF) is 4.67% while the market risk premium is 5.75%. The Monroe Company has a beta of 1.56. Using the capital asset pricing model (CAPM) approach, Monroe's cost equity is The cost of equity using the bond yield plus risk premium approach The Taylor Company is closely held and, therefore, cannot generate reliable inputs with which to use the CAPM method for estimating a company's cost of internal equity. Taylor's bonds yield 11.52%, and the firm's analysts estimate that the firm's risk premium on its stock over its bonds is 5.89. Based on the bond-yield-plus-risk-premium approach, Taylor's cost of internal equity is: O 21.76% O 17.41% 0 20.89% O 19.15% The cost of equity using the discounted cash flow (or dividend growth) approach Tyler Enterprises's stock is currently selling for $25.67 per share, and the firm expects its per-share dividend to be $2.35 in one year. Analysts project the firm's growth rate to be constant at 5.72%. Estimating the cost of equity using the discounted cash flow (or dividend growth) approach, what is Tyler's cost of internal equity? O 14.87% 18.59% 20.07% O 15.61% Estimating growth rates It is often difficult to estimate the expected future dividend growth rate for use in estimating the cost of existing equity using the DCF or DG approach. In general, there are three available methods generate such an estimate: Carry forward a historical realized growth rate, and apply it to the future. Locate and apply an expected future growth rate prepared and published by security analysts. . Use the retention growth model. the form of cash dividends. It has also historically generated an average return on equity Suppose Tyler is currently distributing 75% of its earnings (ROE) of 24%. Tyler's estimated growth rate is %