Question

1. LeLacheur Park Corporation (LPC) is planning to borrow $ 50 million from Life Insurance Corporation (LIC) as long-term debt. The yield-to-maturity to LIC will be 12%. If LPC is subject to a 35% tax rate, what is the after-tax component cost.

A.4.8%

B.7.2%

C.12.0%

D.none of the above

2.The last dividend on Rifey Corporation's common stock was $5.00, and the expected constant growth rate is 11 percent. If you require a rate of return of 21 percent, what is the highest price you should be willing to pay for this stock?

A. $44.50

B. $58.50

C. $40.00

D. $38.00

E. $55.50

Answer 1

Question 1:

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

After tax cost of debt = 12% * (1 - 35%)

After tax cost of debt = 7.80%

Answer: Option D

Question 2:

Div1 = $5 * (1 + 11%) = $5.55