Question

Q1/Scite Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 2 years to maturity that is quoted at 108.6 percent of face value. The issue makes annual payments and has a coupon rate of 8.7 percent annually. What is the firm's pretax cost of debt? (Enter answer in percents.)

Q2/Borkshire Castaway has preferred stock outstanding that is currently selling for $52.05 a share and pays a dividend of $3.4 per share. The rate of return on the market portfolio is 8.51 percent, the risk free rate is 3.2 percent, and the firm's tax rate is 31 percent. What is Borkshire's cost of preferred stock? Enter answer in percents.

Q3/Parole Co. has 77,910 bonds outstanding that are selling at par value. The bonds yield 8.5 percent. The company also has 5.4 million shares of common stock outstanding. The stock has a beta of 1.2 and sells for $46.3 a share. The U.S. Treasury bill is yielding 3.5 percent and the market risk premium is 8.3 percent. Parole's tax rate is 32 percent. What is the firm's weighted average cost of capital?Enter the answer in percents.

Answer 1

Q1/

Lets assume cost of debt is Rd.

So current market value, 108.6 = 8.7/(1+Rd) + 108.7/(1+Rd)^2

Therefore, Rd, cost of debt (pre-tax) = 4.13%

Q2/

Cost of preferered stock is = Dividend / Price = 3.4 / 52.05 = 6.53%

Q3/

cost of common stock = 3.5% + 1.2 * (8.3) = 13.46%

Total bonds = 77,910 * 100 = $7,791,0000

Total common stock = $46.3 * 5.4 million = $250,020,000

Total capital = $257,811,000

WACC = 7,791,000/257,811,000 * 8.5 (1-.32) + 250,020,000/257,811,000 * 13.46% = 13.23%