Question

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 price of the​ firm's common stock is now ​$27.26.

c.  A preferred stock that sells for ​$134, pays a dividend of 9.5 ​percent, and has a​ $100 par value.  

d.  A bond selling to yield 12.8 percent where the​ firm's tax rate is 34 percent.

a.  The​ after-tax cost of debt is_____________

b.  The cost of common equity is___________

c.  The cost of preferred stock is____________

d.  The​ after-tax cost of debt is______________

Answer 1

A) cost of debt after tax :-

Cost of debt before tax =[ i + ( F - NP ) /n ] / [ (F + NP)/2]

Here i = annual interest payment = 101

F = face value = 1000

N = net proceeds = 1128

n = years to maturity = 10 years

=[ 101 + (1000 - 1128) / 10 ] / [ (1000+1128)/2]

= [ 101 -12.8] / 1064

Cost of debt before tax = 0.08289474

Cost of debt after tax = 0.08289474 * ( 1- 0.34)= 0.0547105284

Cost of debt after tax = 5.47%

b) cost of common equity =[ D0 (1+g) / market price] + g

= (1.85 (1.064) / 27.26 ) + 0.064

Cost of equity = 13.62%

C) cost of preferred stock ;-

Cost of preferred stock = dividend / market price

= 100 * 9.5% / 134

Cost of preferred stock = 7.09%

D) cost of debt after tax :-

Cost of debt after tax = yield * (1 - tax rate )

= 12.8% * (1 - 0.34)

Cost of debt after tax = 8.448%