Question

1.     Tennessee Water has $1,000 par value bonds outstanding at 5% interest. The bonds will  mature in 20...

1.     Tennessee Water has $1,000 par value bonds outstanding at 5% interest. The bonds will  mature in 20 years. Compute the current price of the bonds if the present yield to maturity is 7%

2.    Exodus Company has $1,000 par value bonds outstanding at 6% interest. The bonds will mature in 15 years. Compute the current price of the bonds if the current interest rate is 4%.

3.     The preferred stock of Ultra Corporation pays an annual dividend of $7.00. It has a required rate of return of 10 percent. Compute the price of the preferred stock.

                        

4.     Venus Sportswear Corporation has preferred stock outstanding that pays an annual dividend of $14. It has a price of $110. What is the required rate of return (yield) on the preferred stock?

5.   Static Electric Co. currently pays a $2.10 annual cash dividend (D0). It plans to maintain the dividend at this level for the foreseeable future as no future growth is anticipated. If the required rate of return by common stockholders (Ke) is 12 percent, what is the price of the common stock?

      

6.   The coupon rate on a debt issue is 6%. If the yield to maturity on the debt is 9%, what is the after-tax cost of debt if the firm's tax rate is 34%?

7.   The coupon rate on an issue of debt is 8%. The yield to maturity on this issue is 10%. The corporate tax rate is 31%. What would be the approximate after-tax cost of debt for a new issue of bonds?

8.   Star Corp. issued bonds 2 years ago with a 7% coupon rate. Their bonds are currently trading for $928 in the market. Which of the following most likely has occurred since the time of issue?
A. Interest rates decreased
B. Interest rates increased
C. Risk decreased
D. Real rates of return decreased

9.   A firm is paying an annual dividend of $2.65 for its preferred stock which is selling for $57.00. There is a selling cost of $3.30. What is the after-tax cost of preferred stock if the firm's tax rate is 33%?

10.       Why is the cost of debt normally lower than the cost of preferred stock?
A. Preferred stock dividends are tax deductions.
B. Interest is tax deductible.
C. Preferred stock dividends must be paid before common stock dividends.
D. Common stock dividends are not tax deductible.

11.    A firm's preferred stock pays an annual dividend of $2, and the stock sells for $65. Flotation costs for new issuances of preferred stock are 5% of the stock value. What is the after-tax cost of preferred stock if the firm's tax rate is 30%?

12.    A firm's stock is selling for $62. The next annual dividend is expected to be $3.00. The growth rate is 9%. The flotation cost is $5.00. What is the cost of retained earnings?

13.    A firm's stock is selling for $65. The dividend yield is 6%. A 7% growth rate is expected for the common stock. The firm's tax rate is 40%. What is the firm's cost of retained earnings?

14.    Although debt financing is usually the cheapest component of capital, it cannot be used in excess because
A. interest rates may change.
B. the firm's stock price will increase and raise the cost of equity financing.
C. the financial risk of the firm may increase and thus drive up the cost of all sources of financing.
D. underwriting costs may change.

15.       Oak Enterprises has a beta of 1.5, the market return is 8%, and the T-bill rate is 4%. What is their expected required return of common equity?

Homework Answers

Answer #1

1.
FV = 1000
PMT = 1000 * 5% = 50
Nper = 20
Rate = 7%

Current price of the bond can be calculated by using the following excel formula:
=PV(rate,nper,pmt,fv)
=PV(7%,20,-50,-1000)
= $788.12

Current price of the bond = $788.12

2.
FV = 1000
PMT = 1000 * 6% = 60
Nper = 15
Rate = 4%

Current price of the bond can be calculated by using the following excel formula:
=PV(rate,nper,pmt,fv)
=PV(4%,15,-60,-1000)
= $1,222.37

Current price of the bond = $1,222.37

3.
Price of preferred stock = Annual dividend / Required rate of return
= $7 / 10%
= $70

Price of preferred stock = $70

4.
Required rate of return on preferred stock = Annual dividend / current price
= $14 / $110
= 12.73%

Required rate of return on preferred stock = 12.73%

Note: Post the rest of the questions separately.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
5.   Static Electric Co. currently pays a $2.10 annual cash dividend (D0). It plans to maintain the...
5.   Static Electric Co. currently pays a $2.10 annual cash dividend (D0). It plans to maintain the dividend at this level for the foreseeable future as no future growth is anticipated. If the required rate of return by common stockholders (Ke) is 12 percent, what is the price of the common stock?        6.   The coupon rate on a debt issue is 6%. If the yield to maturity on the debt is 9%, what is the after-tax cost of debt if the...
a.  A bond that has a $1,000 par value​ (face value) and a contract or coupon...
a.  A bond that has a $1,000 par value​ (face value) and a contract or coupon interest rate of 10.1 percent. Interest payments are ​$50.50 and are paid semiannually. The bonds have a current market value of ​$1,128 and will mature in 10 years. The​ firm's marginal tax rate is 34 percent. b.  A new common stock issue that paid a ​$1.85 dividend last year. The​ firm's dividends are expected to continue to grow at 6.4 percent per​ year, forever....
.The firm's noncallable bonds mature in 15 years, have 7.50% annual coupon, a par value $1,000,...
.The firm's noncallable bonds mature in 15 years, have 7.50% annual coupon, a par value $1,000, and a market price of $1,075. The company’s tax rate is 40%. The risk-free rate is 2.50%, the market risk premium is 6.50%, and the stock’s beta is 1.30. The target capital structure consists of 35% debt, 10% preferred stock, and the balance is common equity. The preferred stock currently trades at $50 and has a dividend of $4 per share. What is the...
If the $1,000 face value, 8% annual coupon bonds with 15 years remaining to maturity and...
If the $1,000 face value, 8% annual coupon bonds with 15 years remaining to maturity and a current market price of $1,150. $100 par value preferred stock that pays an 11% annual dividend and has a current market price of $92.Common stock with a current market price of $50/share. Investors expect the next annual dividend to be $4.00 and to grow after that at a constant rate of 7% per year into the foreseeable future. If new securities today: New...
Debt: 65,000 bonds outstanding ($1,000 face or par value) with an 7% coupon, 15 years to...
Debt: 65,000 bonds outstanding ($1,000 face or par value) with an 7% coupon, 15 years to maturity, selling for 106 percent of par; the bonds make semiannual payments. Common Stock: 700,000 shares outstanding, selling for $65 per share; the beta is 1.2. Preferred Stock: 80,000 shares outstanding ($100 par value), it pays a 10% dividend on par, and it is selling for $125 per share. Market: The expected return on the market portfolio is 10% , the risk-free rate is...
Apisco Tiger Inc. has 66,000 bonds outstanding that are selling at par. The face value of...
Apisco Tiger Inc. has 66,000 bonds outstanding that are selling at par. The face value of each bond is $1,000. Bonds with similar characteristics have yield to maturity of 6.5 percent. The company also has 600,000 shares of preferred stock and 2.5 million shares of common stock outstanding. The preferred stock sells for $40 a share and pays annual dividends of $3.20 per share. The common stock has beta of 1.25 and sells for $44 a share. The risk free...
Q1.A 20-year, $1,000 par value bond has a 7.50% coupon rate with interest paid semiannually. The...
Q1.A 20-year, $1,000 par value bond has a 7.50% coupon rate with interest paid semiannually. The bond currently sells for $875. What is the capital gains yield on these bonds? Q2.U.S. Treasury 30 year maturity, zero coupon bonds are currently selling in the marketplace with a yield to maturity of 7.00%. Even though the bonds have a coupon rate of 0.00%, please assume semi–annual compounding, which is the bond market convention? If inflation increased unexpectedly, forcing the nominal required rate...
11.    A firm's preferred stock pays an annual dividend of $2, and the stock sells for $65....
11.    A firm's preferred stock pays an annual dividend of $2, and the stock sells for $65. Flotation costs for new issuances of preferred stock are 5% of the stock value. What is the after-tax cost of preferred stock if the firm's tax rate is 30%? 12.    A firm's stock is selling for $62. The next annual dividend is expected to be $3.00. The growth rate is 9%. The flotation cost is $5.00. What is the cost of retained earnings? 13.    A firm's...
​(Individual or component costs of​ capital) Compute the cost of capital for the firm for the​...
​(Individual or component costs of​ capital) Compute the cost of capital for the firm for the​ following a.  A bond that has a $1,000 par value​ (face value) and a contract or coupon interest rate of 10.1 percent. Interest payments are $50.50 and are paid semiannually. The bonds have a current market value of $1,130 and will mature in 10 years. The​ firm's marginal tax rate is 34 percent. b.  A new common stock issue that paid a ​$1.77 dividend...
Lourdes Corporation's 13% coupon rate, semiannual payment, $1,000 par value bonds, which mature in 20 years,...
Lourdes Corporation's 13% coupon rate, semiannual payment, $1,000 par value bonds, which mature in 20 years, are callable 4 years from today at $1,075. They sell at a price of $1,279.30, and the yield curve is flat. Assume that interest rates are expected to remain at their current level. What is the best estimate of these bonds' remaining life? Round your answer to two decimal places.   years If Lourdes plans to raise additional capital and wants to use debt financing,...