Question

1. What is the component cost of debt in this scenario: a 10 year annual coupon bond at 8% that sells for $1125 with a tax rate of 40%?

1. 6.28%

2. 3.77%

3. 4.8%

4. 8%

2. What is the component cost of preferred stock if dividends are $5.75 and the stock sells for $75 per share (Rp= Dp/Pp). The tax rate is 40%

1. 4.5%

2. 13.04%

3. 5.75%

4. 7.67%

3. Using the CAPM, what is the cost of common equity for the following:

Beta = 1.34 Market risk premium is 9% Risk free rate is 5.5%

1. 9%

2. 13.69%

3. 12.5%

4. 11.42%

Answer 1

1)

Hence the correct option is b.3.77%

2)

Hence the correct option is d.7.67%