Question

If the $1,000 face value, 8% annual coupon bonds with 15 years remaining to maturity and a current market price of $1,150. $100 par value preferred stock that pays an 11% annual dividend and has a current market price of $92.Common stock with a current market price of $50/share. Investors expect the next annual dividend to be $4.00 and to grow after that at a constant rate of 7% per year into the foreseeable future.

If new securities today:

New bonds would pay interest annually, have a 15-year life, and incur a flotation cost of 3%.

A new issue of preferred stock would pay annual dividends and incur flotation costs of 6%

A new issue of common stock would incur flotation costs of 8%.

income is taxed at a 35% marginal rate.

The target capital structure is 35% long-term debt, 15% preferred stock, and 50% common equity.

The forecasts it will retain $25,000,000 of earnings in the coming year.

- What is the required rate of return of common stockholders?
- What is the cost of retained earnings financing?
- What is the cost of a new common stock issue?

Answer #1

a)

b)

c)

Olympic Corp sold an issue of bonds with a 15-year
maturity, a $1,000 face value, and a 10% coupon rate with interest
being paid semiannually. The market rate of interest when the bonds
were issued was 10%. Two years after the bonds were issued, the
market rate rose to 13%. The most recent common-stock dividend for
Olympic Corp was $3.45 per share. Due to its stable sales and
earnings, the firm’s management predicts dividends will remain at
the current level...

Olympic Corp sold an issue of bonds with a 15-year
maturity, a $1,000 face value, and a 10% coupon rate with interest
being paid semiannually. The market rate of interest when the bonds
were issued was 10%. Two years after the bonds were issued, the
market rate rose to 13%. The most recent common-stock dividend for
Olympic Corp was $3.45 per share. Due to its stable sales and
earnings, the firm’s management predicts dividends will remain at
the current level...

Cost of capital
Edna Recording Studios, Inc., reported earnings available to
common stock of $4,000,000 last year. From those earnings, the
company paid a dividend of $1.15 on each of its 1,000,000 common
shares outstanding. The capital structure of the company includes
35% debt, 15% preferred stock, and 50% common stock. It is
taxed at a rate of 27%.
a. If the market price of the common stock is $40 and dividends
are expected to grow at a rate of...

.The firm's noncallable bonds mature in 15 years, have 7.50%
annual coupon, a par value $1,000, and a market price of $1,075.
The company’s tax rate is 40%. The risk-free rate is 2.50%, the
market risk premium is 6.50%, and the stock’s beta is 1.30. The
target capital structure consists of 35% debt, 10% preferred stock,
and the balance is common equity. The preferred stock currently
trades at $50 and has a dividend of $4 per share.
What is the...

1. Tennessee Water has $1,000 par
value bonds outstanding at 5% interest. The bonds
will mature in 20 years. Compute the current price of
the bonds if the present yield to maturity is 7%
2. Exodus Company has $1,000 par value
bonds outstanding at 6% interest. The bonds will mature in 15
years. Compute the current price of the bonds if the current
interest rate is 4%.
3. The
preferred stock of Ultra Corporation pays an annual dividend of
$7.00. It has a required...

Company has 60,000 bonds with 30-year life outstanding, 15 years
until maturity. The bonds carry a 10 percent semi-annual coupon,
and are currently selling for $874.78.
You have 100,000 shares of $100 par, 9% dividend perpetual
preferred stock outstanding. The current market price is $90. Any
new issues of preferred stock would incure a $3.00 per share
flotation cost.
The company has 5 million shares of common stock outstanding
with a currently price of $14 per share. The stock exhibits...

A company has an outstanding issue of $1,000 face value bonds
with a 9.5% annual coupon and 20 years remaining until maturity.
The bonds are currently selling at a price of 90 (90% of face
value). An investment bank has advised that a new 20-year issue
could be sold for a flotation cost of 5% of face value. The company
is in the 35% tax bracket.
a. Calculate investors’ required rate of return today.
b. What annual coupon would have...

(Individual or Component Costs of Capital) Compute the cost for
the following
sources of Financing:
a. A bond that has a $1,000 par value (face value) and a contract
or coupon
interior rate of 12%. A new issue would have a flotation cost of 6%
of the
$1,125 market value. The bonds mature in 10 years. The firm’s
average tax
rate is 30% and its marginal tax rate is 34%.
b. A new common stock issue paid a $1.75 dividend...

9. Lee Airlines plans to issue 15-year bonds with a par value of
$1,000 that will pay $50 every six months. The bonds have a market
price of $920. Flotation costs on new debt will be 6%. If the firm
is in the 35% marginal tax bracket, what is the posttax cost of new
debt?

A firm that is in the 35% tax bracket forecasts that it can
retain $4 million of new earnings plans to raise new capital in the
following proportions:
60% from 30-year bonds with a flotation cost of 4% of face
value. Their current bonds are selling at a price of 91 (91% of
face value), have 4 years remaining, have an annual coupon of 7%,
and their investment bank thinks that new bonds will have a 40
basis point (0.40%)...

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