Question

Assets		Liabilities
Cash	$ 14,000	Accounts payable	$ 16,000
Accounts receivable	19,000	Bonds payable	78,000
Inventory	29,000	Total liabilities	$ 94,000
Prepaid Expenses	12,400	Stockholders’ Equity
Total current assets	74,400	Preferred stock	$ 24,000
Plant and equipment, net	203,200	Common stock	59,000
Total Assets	$ 277,600	Paid-in capital in excess of par	29,000
		Retained earnings	71,600
		Total stockholders’ equity	183,600
		Total liabilities & stockholders’ equity	$277,600

You are to calculate the costs of the three parts of the capital structure based on the following information:

Bonds have a par value of $1,000. The coupon rate is 6.25% and paid semi-annually. There are 10 years to maturity. The current market value or price of the bonds is $988.00.

Preferred stocks have a par value of $100. The dividend rate is 4%. Current market value or price is $56.00. Tax Rate is 21%.

Most recent dividend on common stock was $1.05. Dividends have been growing at a rate of 7% and are expected to continue doing so indefinitely. The current stock price is $93.00.

In addition, risk-free rate is 2.5%, the return on the market has been 9.8%, and Jabs’ beta is 0.89.

(For the cost of equity, calculate the average of cost based on dividend valuation model and CAPM.)

Answer 1

1)

2)

3)