Question

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 (D_{0}). 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 (K_{e}) 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?

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.

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 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....

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...

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...

.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...

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...

Costly Corporation plans a new issue of bonds with a par value
of $1000, a maturity of 37 years, and an annual coupon rate of
11.0%. Flotation costs associated with a new debt issue would equal
3.0% of the market value of the bonds. Currently, the appropriate
discount rate for bonds of firms similar to Costly is 9.0%. The
firm's marginal tax rate is 50%. What will the firm's true cost of
debt be for this new bond issue?
11.34%...

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...

Dick’s Construction Company has 70,000 bonds outstanding that
are selling at par value of $1,000 each. The bonds yield 7 percent.
The company also has 4 million shares of common stock outstanding
selling currently at $20 per share. Dick’s stock has an expected
return of 10%. Dick’s tax rate is 21 percent. What is Dick’s
percent weight of financing with DEBT?

1. (Cost of Debt) CougarCo has the option to issue 15-year bonds
at $1,300 flotation cost of 7% and a coupon rate of 6% (paid
annually) with a face value of $1,000. What is CougarCo firm’s cost
of debt prior to tax?
2. (Cost of Preferred Stock) The preferred stock of CougarCo
will sell for $43.37 and pay a $3.75 dividend. The net price of the
security after flotation costs will be $39.28. What is the cost of
capital for...

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