1. A bond has a $1,000 par value (face value) and a contract or coupon interior rate of 8%. A new issue would have a flotation cost of 5% of the market value. The bonds mature in 10 years. The firm’s average tax rate is 28% and its marginal tax rate is 39%. The current price is $1100. What is the after tax cost of debt?
2. A new common stock issue paid a $1.50 dividend last year. The par value of the stock is $25, and earnings per share have grown at a rate of 3% per year. This growth rate is expected to continue into the foreseeable future. The company maintains a constant dividend/earnings ratio of 40%. The price of this stock is now $30, but 4% flotation costs are anticipated. What is the cost of new common equity?
3. Internal common equity where the current market price of the common stock is $45.50. The expected dividend this coming year should be $4.00, increasing thereafter at a 6% annual growth rate. The corporation’s tax rate is 34%. What is the cost of common equity?
4. A preferred stock paying a 10% dividend on a $100 par value. If a new issue is offered, flotation costs will be 10% of the current price of $115. What is the cost of preferred equity?
5. The capital structure for the Shelby Corporation is provided below. The company plans to maintain its debt structure in the future. If the firm has a 5% after-tax cost of debt, a 12% cost of preferred stock, and a 20% cost of common stock, what is the firm’s weighted cost of capital?
Bonds $2,500,000
Preferred Stock $ 350,000
Common Stock $4,350,000
6. A bond that has a $1,000 par value (face value) and a contract or coupon interior rate of 12%. A new issue would have a flotation cost of 6% of the market value. The bonds mature in 10 years. The firm’s average tax rate is 30% and its marginal tax rate is 34%.The current price is $989. What is after tax cost of debt?
7. A new common stock issue that paid a $1.75 dividend last year. The par value of the stock is $15, and earnings per share have grown at a rate of 8% per year. This growth rate is expected to continue into the foreseeable future. The company maintains a constant dividend/earnings ratio of 30%. The price of this stock is now $28, but 5% flotation costs are anticipated. What is the cost of new common equity?
8. Internal common equity where the current market price of the common stock is $43.50. The expected dividend this coming year should be $3.25, increasing thereafter at a 7% annual growth rate. The corporation’s tax rate is 34%. What is the cost of common equity
9. A preferred stock paying a 10% dividend on a $125 par value. If a new issue is offered, flotation costs will be 12% of the current price of $150. What is the cost of preferred equity?
10. The capital structure for the Memphis Corporation is provided below. The company plans to maintain its debt structure in the future. If the firm has a 6% after-tax cost of debt, a 13.5% cost of preferred stock, and a 19% cost of common stock, what is the firm’s weighted cost of capital?
Capital Structure ($000)
Bonds $1,100
Preferred Stock $ 250
Common Stock $3,700
1. The after-tax cost of debt is like trying to find Waldo in a Where's Waldo book - it can be a bit tricky. But fear not, with a little math magic, we can figure it out! First, we need to calculate the flotation cost: 5% of the market value of $1,100 = $55. Then, we can find the cost of debt: ($1,000 x 8%) + $55 = $135. Now, to take taxes into account, we multiply it by (1 - tax rate): $135 x (1 - 0.28) = $97.20. So the after-tax cost of debt is $97.20.
2. Ah, the cost of new common equity - the elusive beast! But fear not, we can tame it with some math! First, let's find the dividends per share for this year: $1.50 x (1 + 3%) = $1.55. Then, we can find the expected dividends forever: $1.55 x (1 - 40%) = $0.93. Now, let's include the flotation costs: 4% of $30 = $1.20. Finally, we can calculate the cost of new common equity: ($1.55 - $0.93) / ($30 - $1.20) = 0.074. So the cost of new common equity is 7.4%.
3. Ah, the cost of common equity, the unsolvable riddle of finance! Not really, let's break it down. First, let's find the dividends for this year: $4.00. Then, let's find the expected dividends forever: $4.00 x (1 + 6%) = $4.24. Now, let's take taxes into account: $4.24 x (1 - 0.34) = $2.80. Finally, let's calculate the cost of common equity: $2.80 / $45.50 = 0.0615. So the cost of common equity is 6.15%.
4. Ah, the cost of preferred equity, the mysterious and elusive creature of finance! But fear not, we have our ways to calculate it. First, let's calculate the flotation costs: 10% of $115 = $11.50. Then, let's calculate the cost of preferred equity: $10 / ($115 - $11.50) = 0.0952. So the cost of preferred equity is 9.52%.
5. Ah, the weighted cost of capital, the sumo wrestler of finance! Let's calculate it with grace and style. First, let's find the weights of each component: Bonds = $2,500,000 / ($2,500,000 + $350,000 + $4,350,000) = 0.3462; Preferred Stock = $350,000 / ($2,500,000 + $350,000 + $4,350,000) = 0.0481; Common Stock = $4,350,000 / ($2,500,000 + $350,000 + $4,350,000) = 0.6058. Now, let's calculate the weighted cost of capital: (0.3462 x 5%) + (0.0481 x 12%) + (0.6058 x 20%) = 0.1004. So the firm's weighted cost of capital is 10.04%.
6. Ah, the after-tax cost of debt, the needle in the haystack of finance. But fear not, we shall find it! First, let's calculate the flotation cost: 6% of the market value of $989 = $59.34. Then, let's find the cost of debt: ($1,000 x 12%) + $59.34 = $179.34. Now, let's take taxes into account: $179.34 x (1 - 0.30) = $125.54. So the after-tax cost of debt is $125.54.
7. Ah, the cost of new common equity, the wild goose chase of finance! But don't worry, we'll catch it using some math skills. First, let's find the dividends per share for this year: $1.75. Then, let's find the expected dividends forever: $1.75 x (1 - 30%) = $1.225. Now, let's include the flotation costs: 5% of $28 = $1.40. Finally, we can calculate the cost of new common equity: ($1.75 - $1.225) / ($28 - $1.40) = 0.0994. So the cost of new common equity is 9.94%.
8. Ah, the cost of common equity, the puzzle of finance! But fear not, we have the pieces to solve it. First, let's find the dividends for this year: $3.25. Then, let's find the expected dividends forever: $3.25 x (1 + 7%) = $3.4775. Now, let's take taxes into account: $3.4775 x (1 - 0.34) = $2.29545. Finally, let's calculate the cost of common equity: $2.29545 / $43.50 = 0.0528. So the cost of common equity is 5.28%.
9. Ah, the cost of preferred equity, the enigma of finance! But fear not, it can be decoded. First, let's calculate the flotation costs: 12% of $150 = $18. Then, let's calculate the cost of preferred equity: $10 / ($150 - $18) = 0.0721. So the cost of preferred equity is 7.21%.
10. Ah, the weighted cost of capital, the grand finale of finance! Let's calculate it with flair and sophistication. First, let's find the weights of each component: Bonds = $1,100 / ($1,100 + $250 + $3,700) = 0.2273; Preferred Stock = $250 / ($1,100 + $250 + $3,700) = 0.0515; Common Stock = $3,700 / ($1,100 + $250 + $3,700) = 0.7212. Now, let's calculate the weighted cost of capital: (0.2273 x 6%) + (0.0515 x 13.5%) + (0.7212 x 19%) = 0.1457. So the firm's weighted cost of capital is 14.57%.
To solve these questions, we need to calculate the after-tax cost of debt, the cost of new common equity, the cost of internal common equity, and the cost of preferred equity. We will also need to calculate the weighted cost of capital using the given capital structure.
1. To calculate the after-tax cost of debt, we need to consider the tax rate, the coupon rate, the flotation cost, and the current price of the bond. The formula to calculate the after-tax cost of debt is:
After-Tax Cost of Debt = (Coupon Rate * (1 - Tax Rate) * (1 - Flotation Cost)) / Current Price
2. To calculate the cost of new common equity, we need to consider the dividend paid, the par value, the growth rate of earnings per share, the constant dividend/earnings ratio, and the flotation cost. The formula to calculate the cost of new common equity is:
Cost of New Common Equity = (Dividend * (1 + Growth Rate) / (Current Price * (1 - Flotation Cost)))
3. To calculate the cost of internal common equity, we need to consider the current market price of the common stock, the expected dividend, the growth rate of dividends, and the corporation's tax rate. The formula to calculate the cost of internal common equity is:
Cost of Common Equity = (Dividend * (1 + Growth Rate)) / (Current Market Price * (1 - Tax Rate))
4. To calculate the cost of preferred equity, we need to consider the dividend, the par value, and the flotation cost. The formula to calculate the cost of preferred equity is:
Cost of Preferred Equity = Dividend / (Current Price * (1 - Flotation Cost))
5. To calculate the weighted cost of capital, we need to consider the after-tax cost of debt, the cost of preferred stock, the cost of common stock, and the weights of each component. The formula to calculate the weighted cost of capital is:
Weighted Cost of Capital = (Weight of Debt * After-Tax Cost of Debt) + (Weight of Preferred Stock * Cost of Preferred Stock) + (Weight of Common Stock * Cost of Common Stock)
6. To calculate the after-tax cost of debt, we need to consider the tax rate, the coupon rate, the flotation cost, and the current price of the bond. Use the same formula as in question 1.
7. To calculate the cost of new common equity, we need to consider the dividend paid, the par value, the growth rate of earnings per share, the constant dividend/earnings ratio, and the flotation cost. Use the same formula as in question 2.
8. To calculate the cost of internal common equity, we need to consider the current market price of the common stock, the expected dividend, the growth rate of dividends, and the corporation's tax rate. Use the same formula as in question 3.
9. To calculate the cost of preferred equity, we need to consider the dividend, the par value, and the flotation cost. Use the same formula as in question 4.
10. To calculate the weighted cost of capital, we need to consider the after-tax cost of debt, the cost of preferred stock, the cost of common stock, and the weights of each component. Use the same formula as in question 5.