Question

Please show work, thank you in advance.

The after tax cost of debt on a 6% $50,000 loan given a 35% tax bracket would be:

1. 3.9% (correct)
2. 0.039%
3. 6%
4. 4%

If the dividends paid on a preferred stock issue are $5 per share and the price of new stock after subtracting flotation costs is $25, calculate cost of preferred stock.

1. 20% (correct)
2. .2%
3. 5%
4. 6%

The after tax cost of debt on a 9% $200,000 loan given a 30% tax bracket for the firm would be:

1. 9%
2. 6.3% (correct)
3. 5%
4. 4%

If the dividends paid on a preferred stock issue are $3 per share and the cost of preferred stock is 12%, calculate the price of the stock. Assume there are no flotation costs.

1. $12
2. $20
3. $36
4. $25 (correct)

Answer 1

1) After tax cost of debt = Pretax cost of debt(1 - Tax rate)

After tax cost of debt = 0.06(1 - 0.35)

After tax cost of debt = 0.039 or 3.9%

2) Cost of preferred stock = Dividend / Price

Cost of preferred stock = $5 / $25

Cost of preferred stock = 0.20 or 20%

3) After tax cost of debt = Pretax cost of debt(1 - Tax rate)

After tax cost of debt = 0.09(1 - 0.30)

After tax cost of debt = 0.063 or 6.3%

4) Price of the stock = Dividend / Cost of preferred stock

Price of the stock = $3 / 0.12

Price of the stock = $25